A Look into Different Mortgage Rates
As there are different types of mortgages, there are many types of interest rate deals too, each with its merits and demerits. The suitability of each option depend your personal financial situation. Let us examine each interest rate packages in detail here.
Standard variable rate: Under this option, your payments move up or down at the lender’s discretion. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down. Generally there are no early repayment charges, but you will have to check this with the lender. Usually you can leave your lender without any penalties or problems. You can usually pay back extra amounts and cut your interest costs without a penalty. It moves with interest rates. So if the lender decides to increase the rate your monthly payments will increase. It may be expensive compared to other deals. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down.
Tracker rate: This is a variable rate loan with an interest rate that is equal to or a set amount above or below the Bank of England or some other base rate. It tracks, means moves up or down with, that rate. It is useful to go for a tracker if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down. It is not a good choice if your budget won’t stretch to higher monthly payments. Early repayment charges may have to be paid sometimes during any special deal period and maybe even after that period also.
Discounted interest rate: Under this scheme, your monthly payments can go up or down, but you get a discount on the lender’s standard variable rate for a set period of time. At the end of the deal, you usually change over to the full standard variable rate. It gives you a gentler start to your mortgage, at a time when money may well be tight. But you must be confident you can afford the payments when the discount ends. The discount period is limited, so do not get used to those early low repayments. You may not be able to make overpayments and pay off the loan early without penalties. The lender may not reduce, or may delay reducing their variable rate even if the Bank of England rate goes down. You will have to pay early repayment charges during the special deal in most cases. This may be applicable even after the end of the special deal period as well.
Fixed interest rate: Under this deal, your payments are set at a certain level for an agreed period. At the end of that period, they will usually switch you to the standard variable rate. Your payments will stay the same in that period, even if interest rates go up. This gives you the security of knowing that you can afford your payments and will make it easier for you to budget. If rates go down, you won’t benefit. Your payments will stay at the higher rate. You may not be able to make overpayments and pay off the loan early without penalties.
Capped rate: Under this option, your payments are variable and often linked to a base rate, but fixed not to go above a set level known as the cap during the period of the deal. At the end of the period, you are usually charged the lender’s standard variable rate. You know the maximum you will pay for a set period of time. Useful if you want the security of knowing that your payments can’t rise above the set level, but still benefit if rates fall.
Collared rate: This scheme may be used in conjunction with a capped rate or a tracker or both. Your payments are variable but will not fall below a set level, also known as the ‘collar.’ It may be part of another interest-rate deal which otherwise appears attractive. But note that if the rate payable is only just above the ‘collar’ and you think rates will fall; you may not get the full benefit of a reduced payment
