Various Interest Rates
You've looked into all the different kinds of mortgages and found one that works for you. Now is the time to think about how much interest you want to pay. What kind of interest you pay will depend on your situation and how much you want to pay each month. You'll see that not all interest rates and types are the same in the next section.
A lower price
With a discounted rate, the buyer can pay less for a certain amount of time. The rate usually goes up to the national base rate after the fixed term is over. Discounted rates are good for people who are buying a home for the first time or who need extra money for repairs. The length of the discount does give you time to get used to having a mortgage payment.
Set prices
With a fixed-rate mortgage, you know that your interest rate will stay the same every month for a set amount of time. As long as you have a fixed-term contract, this rate will not change. The fixed term can be between 1 and 7 years long. When you get a fixed-rate mortgage term, be careful and don't forget to ask the lender if you have to stay with them after the fixed term is over.
Variable rate
Variable-rate mortgages do change around the base rate, and they are usually more expensive than discounted, fixed, and capped rates. Usually, your interest rate will go from a discounted rate to a variable rate after a certain amount of time. This could be for a set amount of time that you and the lender agree on.
Rates capped
In a capped-rate mortgage, the lender caps the mortgage rate at a certain amount. This means that the interest rate can't go higher than this amount for a set amount of time. But if the interest rate goes down? Your rate will too.
Tracker mortgages
A tracker mortgage is one that follows the base rate set by the Bank of England. This means that the interest rate on your mortgage stays the same. Your monthly mortgage interest payments are affected by a tracker in that they go up when the base rate goes up and down when the base rate goes down.
A tracker mortgage is similar to a standard variable rate mortgage in that it follows the Bank of England's percentage rate. Unlike a standard variable-rate mortgage, which changes once a year or once a month, a tracker mortgage guarantees to follow changes in the Bank of England base rate within two weeks of the interest rate changing. This lets the borrower take advantage of both falls and rises in the interest rate more quickly.
But there are some bad things about tracker mortgages. If interest rates went up by a lot, the cost of a tracker would go up by the same amount. In this case, you would lose out and end up paying more each month than you did the month before. In this case, the borrower would have been better off with a fixed rate or capped rate mortgage.
Trackers work better for the borrower when interest rates go down, but they also give you a clear picture of what the Bank of England does with rates when you look at the bigger picture. Both the borrower and the lender know exactly what they are getting when they use a tracker.
Flexible Mortgages
With a flexible-interest mortgage, you can usually pay more if you have extra money, less if you need to save a little, or maybe even stop paying for a while. Flexible is exactly what it says it is. Also, with a flexible mortgage, the interest is calculated every day instead of once a year. So, each time you make a payment, the amount of interest goes down.
Look at the APR
Check the Annual Percentage Rate (APR) of any mortgage you are thinking about getting for a certain amount of time. Most of the time, the amount you pay back each month will be less than the APR. But be careful, because some lenders will offer you a very low APR for a set amount of time and then a standard rate for another set amount of time. Some people can have bad things happen in situations like this. If you have a discounted mortgage rate for two years at 3.9 percent, which comes out to a monthly payment of GBP300, but you still have a two-year contract with the lender at a rate of 5.9 percent after the 3.9 percent term ends, your monthly payment will go up by a lot.
In this case, you might not be able to pay your mortgage, and you might not be able to switch to a different lender because early breach of contract penalties make it impossible.
Redemption penalties
Most of the different types of discounted mortgages, like capped, discounted, and fixed, have a penalty for early repayment. This is because the lender has a special interest rate for a set amount of time. Some standard rate periods can last longer than special rate terms. So, don't forget to read the fine print and always ask about the penalties for getting out of the mortgage early and how long the standard rate period is. There are now mortgages that don't have fixed fees or make you stay with the same lender during the discounted period.
