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Mortgage Information - Mortgage Interest Types

 

Mortgage Interest Types - Mortgage Information

 

What are Mortgage Interest Types?

Types of Mortgage Interest rate
There are are a few different types of interest rate but the most important one is the standard vriable rate (SVR). This is the rate mortgage lenders will charge as standard, once any introductory discount rate periods have ended. If the SVR is high and you are tied into the sceme with an overhanging redemption penalty you could stand to lose all that you have gained from the introductory discount.

Standard Variable Interest Rate Mortgage ( SVR )
With an SVR your mortgage lender sets the interest rate you pay. The mortgage lender bases this rate on the Bank of England's base rate, and so when the banks base rate changes the standard variable rate will change. The SVR is normally between 2 and 4 percent higher than the banks base rate, but varies from lender to lender. The advantage of this is that when the Bank of England's base rate is low your monthly mortgage interest repayments will be low too. Of course when the base rate is high you will be paying higher monthly repayments.

With an SVR you are able to change lenders at any time without being penalised with early redemption penalties. If you start a mortgage with a different type of interest repayment for an agreed term, once the term finishes you will go back to the SVR. A standard variable rate is most suitable for someone who is likely to shop around to get the lowest interest rates, by re-mortgaging regularly. There are no redemption penalties with a SVR so you can change mortgage lenders with no charge.

Fixed Interest Rate Mortgage
Fixed rate mortgages allow you to repay interest at a fixed rate, irrespective of the Bank of England's base rate fluctuations. Your monthly repayments will remain the same every month for a time period agreed between you and the lender (normally between 1 and 25 years). Once that period ends your mortgage will be transferred to a standard variable rate mortgage.

There is normally a fixed period involved, there is a redemption penalty charged for leaving the mortgage before the fixed rate term has ended. You may find that this period continues after the fixed rate period finishes. This means you could be tied into the mortgage for several years after the fixed rate period has ended. If the mortgage lenders SVR is high you are stuck with it, unless you pay the redemption penalty in order to leave the mortgage.

The lenders SVR is often the most important factor to consider when choosing a mortgage. You may have a low fixed rate for a number of years, but if you are tied in for several years after the fixed rate has ended, you could find yourself paying a high SVR and losing all that you gained.

Fixed rate mortgages are suitable in certain situations only. If the Bank of England's base rate is fluctuating a fixed rate mortgage might be a good one to go for because your mortgage payments will remain the same so you can budget more easily. If the Bank of England's base rate remains consistently lower than your fixed rate you would stand to lose a lot of money unless you could come to an agreement with your mortgage lender. Another disadvantage is that a lender might need a non-refundable up front booking fee to be paid on application to reserve the mortgage. Arrangement fees for mortgages are often required with this type of rate.

Discounted Interest Rate Mortgage
A discount mortgage rate is a variation of the standard variable rate. It provides a discount from the lenders SVR for a fixed period of time agreed between borrower and mortgage lender. Often the larger the deposit you provide the larger the discount will be. The same rule occasionally applies if the property price is very high. The interest rate still fluctuates, that means your monthly repayments may change slightly from month to month, but the discount remains constant. A discount rate mortgage is an incentive scheme used by lenders to attract new customers. Some discounted rate mortgages also include some cash back.

Discount rate mortgages might be most beneficial to first-time-buyers as the savings made in the early years of the mortgage could be used to furnish the house. But early and overhanging redemption penalties nearly always apply so its worth finding out the lenders SVR as well so you know how much you will be paying once the discount period ends.

Capped Interest Rate Mortgage
Capped interest rate mortgages fluctuate in the same way as a SVR mortgage, or a base rate tracker but cannot rise above an agreed percentage. This agreed percentage is the cap and you can enjoy the low interest rates but your monthly repayments will not rise too high when the Bank of England's base rate rises.

With most SVR variations you will be transferred back to the SVR once the agreed Capped rate period ceases. If you decide to leave the mortgage scheme before the agreed period finishes you will incur an early redemption penalty. Some schemes also have overhanging redemption penalties. The redemption charge still applies after the agreed capped rate period ends. This means you could be tied in to the mortgage scheme whilst paying the lenders SVR. You may also have to pay an application fee when beginning a capped rate mortgage.

A capped rate carries the advantages of a fixed rate mortgage, whereby you can budget better knowing the maximum your monthly repayments will be. Unlike the fixed interest rate you have the possibility to save money when the Bank of England's base rate falls. But you may find that the cap associated with a capped interest rate will be slightly higher than a fixed rate.

Base Rate Tracker Mortgage
Base rate tracker mortgages track the Bank of England's base rate and changes in accordance, with a constant differential, set by the mortgage lender. Your monthly mortgage interest payments go up when the base rate goes up and they go down when the base rate goes down. The base rate tracker interest rate is normally between 0.5% and 1.0% greater than the B.O.E's Base Rate. Base rate Trackers are available for a fixed term period agreed between borrower and lender, but can also be used for an entire mortgage term.

Mortgage lenders usually base the percentage differential (between the base rate and base rate tracker) on your homes Loan to Value ( LTV ). A home with a low LTV rate will usually achieve a low base rate tracker interest rate, whereas a home with a high LTV will usually give you a higher interest rate differential.

The base rate tracker mortgage is normally a low interest rate mortgage, and can be combined with a discount for a fixed period, but it still has its downsides. As with all fixed period mortgage interest rate schemes many mortgage lenders will charge a redemption penalty if you wish to leave the mortgage scheme. Known as an early redemption penalty. Some mortgage lenders can also charge an overhanging redemption penalty. This is where the redemption penalty still applies after the base rate tracker fixed period has finished, and you are on the lenders SVR. Base rate trackers could be difficult to budget for as the Bank of England's base rate fluctuates.

List of Major Mortgage Lenders

 

OCIS provide general financial information, we urge you to consult an Independent Financial Adviser ( IFA )
before making any important decisions about your finances.

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