Mortgage Interest Rate Options:
For both repayment and interest-only mortgages, there is a variety of ways in which interest can be charged to the mortgage account. For instance, some lenders charge interest on an annual basis, some on a monthly basis, and some on a daily basis. Generally, it is the lender who decides how interest is charged, although this may vary between different mortgage products. Lenders will generally offer a range of ‘mortgage products’. The main types are:
- Variable rate – Monthly payments rise and fall in line with interest rate changes. Downside of this product is hard to predict what future payments will be, making budgeting difficult. However, there is no early repayment penalty if you wish to change for different mortgage product.
- Discounted rate – Interest rate is a discount from the standard variable rate for a set period (e.g. two or five years) for your whole mortgage. Discount mortgages can be a great, cheap deal while they last. But it can raise or lower by any amount and at any time of SVR. Remember if the SVR did increase, make sure you can afford to pay more every month. Fixed rate – Interest rate is fixed for a specific period (usually between two and five years) then reverts to the standard variable rate SVR. It is great mortgage product it makes easier for borrowers to budget. Always check if this product has substantial arrangement fee and penalties for early repayment. Borrowers will not benefit from falls in interest rates down.
- Capped rate – Interest rate is variable but cannot rise above a specified upper limit call The Cap. Products that also have specific lower limit called The Collar. This product allows you to
budget within set parameters. You can benefit from falls in interest rates down as far as any collar limit set.
- Base Rate Tracker – Interest moves up and down in line with ‘Tracks ‘changes in Bank rate. So, when the base rate moves so will your interest rate, and your monthly repayments. These mortgages tend to be cheaper than fixed rate mortgages as you don’t have the security of knowing exactly what you will pay each month.
- Offset Mortgage – allows you to link your savings and current account to your mortgage. So, you put your savings into an account that is linked to your mortgage and the balance of your savings account is ‘offset’ against your mortgage. For example, if you had a £200,000 mortgage, savings £20,000, you could offset your savings and pay interest on the £180,000.If you keep the same monthly repayments based on the full amount of your mortgage, the balance will reduce faster – in other words, you could pay your mortgage off earlier. Whilst offsetting, you don’t earn any actual interest on the accounts you link to your mortgage. Your savings are used to reduce (or ‘offset’) your mortgage balance. What this means is that the effective rate earned on your savings is equal to the mortgage rate – currently 4.25%.