Most providers of mortgages will offer a range of products to which a number of different interest rate options may be applicable. These are as follows:
The interest rate is set for an agreed period. This can be for 1 to 10 years or more. At the end of the agreed period the mortgage continues with a variable interest rate.
Fixed Rate mortgages offer peace of mind, since you are protected against rising interest rates and have the comfort of knowing exactly what your repayments will be during the initial fixed rate period. However, should the variable rate fall, you will continue to pay interest at the fixed rate.
This rate is set by a Bank or Building Society and varies in line with market conditions. Repayments may therefore fluctuate. Any fall in this rate result would in lower monthly repayments, but an increase may mean higher monthly payments.
Here, the interest rate applicable to your loan is reduced by a specific percentage for an agreed period. Repayments will always be less during this period. However, they can still rise or fall with interest rate changes.
A tracker rate fluctuates in line with Bank of England Base Rates. If Base Rates fall, so will your mortgage payments, conversely any increase in rates will mean your monthly outgoings will rise.
This is where your interest rate is capped for a specified period and during that period the interest rate you are paying will not go above this figure, no matter to what the Building Society’s variable rate increases. However, your repayments will still fall in line with any reductions in the variable rate. Capped Rate loans offer the best of both worlds during the agreed period, the monthly payment can not rise above a known amount (however high the general interest rate) and yet it will reduce in line with variable rate reductions.
These are designed to smooth out the peaks and troughs of fluctuating interest rates. You select an interest rate within certain limits the interest you wish to pay (the Stabilised Payment Rate) and your payments are calculated using that rate. You can amend your Stabilised Payment Rate once a year. You will still be charged interest on the mortgage using a variable rate, which varies in line with market conditions. The difference arising from the two rates is accumulated in a separate sub-account, which has to be settled at the end of the mortgage period.
Although this option means that your repayments are fixed, this product is not a fixed rate mortgage. There could be a significant lump sum to pay at the end of the mortgage if the chosen interest rate is consistently below the variable rate.
Here the mortgage will be linked to the published money market rate known as LIBOR. Interest rates under a facility of this nature are normally fixed for periods of three months at a time.
LIBOR rate is generally lower than the variable rate and there is protection against rising interest rates through the three-month period. In addition, there is the added comfort of knowing exactly what your payments will be during the quarter. However, should rates fall during the quarter, interest will continue to be paid at the fixed rate.
Most special offer mortgages are ‘portable’, which means that if you move house, you will still be eligible to benefit from any reduced interest rate on the portion of your loan to the new property at the same interest rate.
These are a fairly new development in the British market, imported from other countries where they have been popular for some time. It is possible to use either an interest only or repayment structure.
The key points to note with regard to Flexible Mortgages are as follows:
•
Overpayments - You are able to make overpayments (payments above
the required monthly amount). These are credited immediately.
• Payment holidays - Once a credit has been built up from
overpayments this can be used to take payment holidays.
• Savings accounts - It is possible to take back any overpayment
at a later date.
• Banking services - Some lenders give full banking facilities, so a monthly
salary can be paid into the account. A cheque book and credit card would normally
be provided.
Normally on this type of mortgage interest is calculated daily. Any overpayment will immediately reduce the outstanding loan and so the interest that must be paid. Flexible mortgages are sometimes known as Australian-style mortgages, as this interest basis is common in Australia.
The key benefits are therefore that the payments may be varied to suit your situation. You can make substantial savings on interest payments, or even pay off your mortgage early and own your home sooner.