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Different Mortgage Types
Variable Rate Mortgage
With a variable rate mortgage the monthly repayment amount is based
on the lender's standard variable rate.
The lender's standard variable rate is based on the Bank of England's
base rate and will consequently move up and down as the base rate
moves up and down. Standard variable rates vary from lender to lender
but are typically 2 to 4 percent above the base rate.
Advantages
- You are able to change mortgage at any time without being penalised
as there are no early redemption penalties.
- You can benefit from a fall in the Bank of England's base rate
that leads to a subsequent fall in your lender's standard variable
rate.
Disadvantages
- The Bank of England base rate can be unpredictable and can increase
rapidly, resulting in an increase in your monthly payments.
- It is less easy to budget as the interest rate can and will
vary.
- A fall in the base rate will not always result in an equivalent
fall in the lender's standard variable rate.
Fixed Rate Mortgage
With a fixed rate mortgage the monthly repayment amount is fixed
for a specified period. The fixed rate remains constant irrespective
of changes to the Bank of England's base rate or the lender's standard
variable rate.
The fixed rate period typically lasts for two to five years, although
it can be longer. At the end of the fixed rate period the interest
rate reverts to the lender's standard variable rate. An early redemption
penalty will apply should you wish to cancel your mortgage before
the end of the fixed period.
Furthermore, many fixed rate mortgages 'tie you in' for longer periods.
This is because an early redemption penalty is charged if you cancel
your mortgage within a set number of years following the end of
the fixed rate period.
Advantages
- It is easier to budget for your mortgage repayments as you will
know exactly how much you will be paying over the fixed rate period.
- You can usually benefit from a lower interest rate in the first
few years, freeing up money for furnishings, carpets or whatever
else you want.
- You are protected from any increases in the Bank of England's
base rate.
Disadvantages
- Early redemption penalties will almost certainly apply, which
may also extend beyond the end of the fixed rate period. This
means you will be unable to change your mortgage during the 'early
redemption penalty period' without paying a fee, which may be
up to the value of six months mortgage repayments.
Consequently:
- During the fixed rate period you may miss out on a more competitive
interest rate if the lender's standard variable rate drops to
less than the fixed rate.
- You may be trapped in an uncompetetive rate once the interest
rate reverts to the lender's standard variable rate.
- You will normally have to pay an application fee when arranging
your fixed rate mortgage.
Discount Mortgage
A discount mortgage has an interest rate where a discount is
applied to the lender's standard variable rate for a set period,
usually from six months to several years. As the lender's standard
variable rate moves up and down, so the discounted rate moves
up and down by the same amount, with the differential between
the two remaining the same.
Advantages
- You can benefit from a lower interest rate in the first few
years, freeing up money for furnishings, carpets or whatever
else you want.
- You can benefit from a fall in the Bank of England's base
rate when it results in a subsequent fall in the lender's standard
variable rate.
Disadvantages
- Early redemption penalties will almost certainly apply, which
may also extend beyond the end of the discounted period. This
means you will be unable to change your mortgage during the
'early redemption penalty period' without paying a fee, which
may be up to the value of six months mortgage repayments. So,
you may be trapped in an uncompetitive rate once the interest
rate reverts to the lender's standard variable rate.
- You will normally have to pay an application fee when arranging
your discount mortgage.
- At the end of the discounted period your mortgage payments
will suddenly increase as the mortgage reverts to the lender's
standard variable rate.
Capped Mortgage
A capped mortgage ensures that the interest rate does not rise
above a predefined threshold, the capped rate. The interest rate
is usually the same as the lender's standard variable rate, but
will not rise above the capped rate.
Capped rate mortgages are also available in conjunction with some
discount mortgages.
Advantages
- You can benefit from a fall in the Bank of England's base rate
that leads to a subsequent fall in your lender's standard variable
rate. At the same time you remove the risk of the interest rate
increasing beyond a known level, allowing you to budget more easily.
Disadvantages
- Early redemption penalties will almost certainly apply, which
may also extend beyond the end of the discounted period. This
means you will be unable to change your mortgage during the 'early
redemption penalty period' without paying a fee, which may be
up to the value of six months mortgage repayments. So, you may
be trapped in an uncompetitive rate once the interest rate reverts
to the lender's standard variable rate.
- You will normally have to pay an application fee when arranging
your capped mortgage.
Tracker Mortgage
Tracker mortgages follow changes in the base rate, with a constant
differential being maintained between the base rate and the mortgage
interest rate.
A lender's standard variable rate will typically be around 1.5%
above the base rate. In addition, a fall in the base rate will
not always necessarily be followed by an equivalent fall in the
standard variable rate. However, tracker mortgages tend to have
a smaller difference above the base rate, down to around 0.75%
or even lower, and they are guaranteed to rise and fall with the
base rate.
This means if the base rate rises your monthly payments will rise.
If the base rate falls your monthly payments will fall.
The period for which the tracker mortgage applies may be for a
fixed term only, say 5 years, after which time the interest rate
will revert to the lender's standard variable rate. Tracker mortgages
are also available that persist for the full term of the mortgage.
Some mortgage lenders will offer different tracker rates depending
on the amount you are borrowing as a percentage of the value of
your home (LTV - Loan to Value). For example, 0.75% above the
base rate may be offered for a mortgage with an LTV of 90%. Alternatively,
1.5% above the base rate may be offered for a mortgage with an
LTV of 95%.
A tracker mortgage may be offered in conjunction with a discount
offer. For example, 0.5% above the base rate may be offered for
the first 2 years, rising to 0.75% above the base rate after the
discount period.
Advantages
- The interest rate payable will usually be lower than the lender's
standard variable rate.
- You can benefit from all drops in the Bank of England's base
rate as they will always lead to an equivalent fall in your
tracker mortgage's interest rate.
Disadvantages
- Early redemption penalties may apply which could extend beyond
the end of the discounted period. This means you will be unable
to change your mortgage during the 'early redemption penalty
period' without paying a fee, which may be up to the value of
six months mortgage repayments.
- The Bank of England base rate can be unpredictable and can
increase rapidly, resulting in an increase in your monthly payments.
- It is less easy to budget as the interest rate can and will
vary.
Cashback Mortgage
A cashback mortgage is one where a lump sum is paid to the mortgage
applicant on completion of the mortgage. It is a scheme that is
offered alongside other mortgage products. The cash can be used
as you wish.
Advantages
- The additional cash can be useful at a time when you may have
little spare cash. The money can be used to pay solicitor's
fees, buy furnishings, carpets etc. You could even put the money
into a savings account and use it to assist in making mortgage
repayments in the first few months or years.
Disadvantages
- Early redemption penalties will almost certainly apply. This
means you will be unable to change your mortgage during the
'early redemption penalty period' without paying back the lump
sum received, or paying a fee, which may be up to the value
of six months mortgage repayments. Consequently, you may end
up being trapped in a mortgage with an uncompetitive rate.
- You may have to pay an application fee when arranging your
cashback mortgage.
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