Interest Rates Explained

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June 14, 2019

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Interest Rates Explained

You might have heard about mortgage rate types and are not too sure what they are all about, well our jargon buster is perfect to tell you everything you need to now about how a Fixed Rate Mortgage and a Tracker Rate Mortgage works so you  can make the best decision.

Fixed Rate Mortgages

One of the most popular types of mortgage chosen over the last 6 years, mainly due to the low rates of interest available and the small difference between Fixed Rates and other types of interest rate.

The bank will offer you a mortgage with a pre-determined rate of interest which will apply for a period of between 2 and 5 years, during this time your monthly payment will not change regardless of what happens to interest rates. After the initial fixed rate period has expired you will revert to the banks standard rate. You will be free to look at other lenders to see if they can offer you a better rate at that time.

Key Features

  • You will know what your mortgage repayments will be for a set period.
  • You can set the fixed rate for any period usually between 2 and 10 years.
  • Your payments will not change regardless of changes in interest rates.
  • You can usually move the mortgage to another house if you move home.

With these deals, you’ll be charged a penalty if you end the mortgage before the initial Fixed Rate period has expired however some lenders will allow you to make overpayments within set limits.

Variable Rate Mortgages

These include mortgages such as the Tracker mortgage which is very popular and also variable rate mortgages and discounted rate mortgages, all of which we explain below.

Tracker Rates are the second most popular mortgage; these are quite the opposite to a fixed rate in that the rate is linked to the Bank of England base rate. So if the base rate changes, your mortgage payments will change.

Typically your bank will set the rate at a margin above the base rate, so if the base rate is 0.50% and your bank offers you a rate of 2% above the base rate, your actual mortgage interest rate will be 2.50%. If the Bank of England put the base rate up by 1%, your mortgage rate would increase to 3.50%. This would add about £25 a month to the repayments on a £100,000 mortgage.

As with fixed rate mortgages, trackers are available over different terms: most commonly two or five years. With these deals, you’ll be charged a penalty if you end the mortgage before the initial tracker period has expired.

Discounted Rate mortgages are also variable like the tracker so your mortgage payments can increase or decrease, however they are not linked to the Bank of England’s Base Rate but to the Banks own Standard Variable Rate (SVR). the key difference is that this rate can change independently of the Bank of England.

You don’t get to budget with a Discounted Rate but you do get the possibility of a cheaper deal to start with and that your rate could decrease.

Key Features

  • These mortgages are usually cheaper to start with as the lender will offer an introductory rate.
  • Your mortgage repayments will decrease if interest rates decrease.
  • Your mortgage repayments can change during the term of the mortgage of the lender or the Bank of England change their rate.

There are risks with a variable rate mortgage in that you may be tied to the lender and have no control over interest rate changes.

If you have finished a special rate such as a fixed or introductory variable rate your lender will revert you to their standard variable rate, these are usually much higher than rates available in the market place so call our advisers to see how much you could save by switching your mortgage or compare mortgages on our website.

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