Different types of mortgage rates
There are various types of mortgage rates offered by lenders; to help you cut through the jargon here is a list of all the main types of mortgage rates.
Fixed Mortgage Rates
Some mortgage lenders will offer a fixed mortgage rate for a period of time no matter what happens to the mortgage rate. This will guarantee the amount that you pay for each month for that period of time. However once the fixed time period comes to an end, your repayments will go back to the normal variable rate the lender sets.
The normal period for fixed term mortgages ranges from 6 months to 5 years. So even if mortgage rates go up above the rate you have agreed you will not pay the extra amount. However the reverse is also true, if the mortgage rate falls you will still pay the normal rate.
Variable Mortgage Rates
The bank of England sets the base rate, also known as the standard
rate of interest. Mortgage lenders will normally set their mortgage
rates 1% or 2% above this. So for example if the Bank of England sets
the rate at 3% you will generally pay 5 %.
Often if you take out another mortgage deal, such as capped, fixed or
discounted your mortgage rate will revert back to the variable rate
after you get to the end of the period you have agreed.
Capped Mortgage Rates
This is where the interest rate is capped at a maximum level. The mortgage rate can rise or fall but it will never go above this level. Capped rate mortgages will generally appeal to people who do not feel that the mortgage rate will go above the rate it is capped at or to or customers who think that the mortgage rate will stay low for a considerable period of time. Often people will budget for the maximum capped rate and therefore will not be caught out if the interest rate goes above this. This gives many people peace of mind and security without the need to borrow more in the future.
Discount Mortgage Rates
A discounted mortgage rate means that you will pay a set amount usually below a lender's standard variable rate for a certain period of time. The standard variable rate will go up and down but the discount mortgage rate will stay at the same level for the period agreed by the mortgage lender. These types of mortgages are beneficial to people who want to keep their mortgages as low as possible in the initial period. However clients should be wary as mortgage companies tend to charge redemption penalties to switch mortgages or to dispose of it.
Tracker Mortgage Rates
A tracker mortgage is slightly different to most mortgages – basically a tracker mortgage rate seeks to follow the interest rate set by the Bank of England. Unlike an ordinary variable rate mortgage, the tracker should mirror the Bank of England’s interest rates as they rise and fall, maintaining the same margins between the rate you pay and the base rate as set by the Bank of England.
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