Mortgage interest types explained
There are various different mortgage rates & deals available to potential borrowers, such as fixed, discounted, capped and tracker to name a few, and it can get confusing when trying to weigh up which is the best deal for you - for your convenience we have listed explanations & illustrations below to explain the most popular types available.
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The mortgage interest rate & type that's best for you & your family will depend on your individual needs & circumstances, we would always recommend speaking to a mortgage professional to obtain the best advice possible.
The first two type of interest rates are obviously interest only or capital repayment, they are fairly straightforward to understand - with a capital repayment mortgage each monthly mortgage payment goes towards repaying the capital owed and the interest, with an interest only mortgage the monthly payment simply pays the interest on the loan.
Standard variable rate mortgage
A lenders standard variable rate mortgage is what a lender uses as their standard interest rate and is typically the rate at which other rate types are offset against.
The rate, and subsequent mortgage payment will rise and fall in line with the lenders standard rate of interest.
The lenders standard variable rate will tend to follow the Bank of England base rate fluctuations, so if the Bank of England base rate rises or falls, the lenders standard variable rate will normally follow suit shortly after.
One of the benefits of a standard variable rates is that, if interest rates are low then the associated mortgage payments will be reduced.
Discounted interest rate
Discounted rate mortgages allow a discount on the lenders standard variable interest rate over a set period of time and are offered as an incentive for borrowers to go with certain lenders.
A discounted rate can be beneficial if you feel interest rates are going to be low over the first few years of your mortgage as a discounted rate will let you benefit from the lenders low standard rate with even lower payments from the discount.
For example, if you get a discount of 1.5% for 2 years - you will benefit from a rate of 1.5% less than the lenders standard variable for a period of 2 years.
If interest rates go up drastically your payments will increase also, its important to consider all factors such as future interest movements, our mortgage professionals will be able to shed some light on mortgage trends to help you decide if this mortgage type is right for you.
Tracker interest rate
Tracker rate mortgages allow borrowers to get an interest rate that tracks the Bank of England base rate, the difference between the Bank of England base rate and a lenders standard variable rate is, the Bank of England base rate can be lower as many lenders base their standard variable on the Bank of England base rate, as with a standard variable rate, interest rates can go up as well as down and your tracker mortgage will follow suit.
Whilst you can benefit whilst rates are low, you can get penalised if rates rise over and above what you are expecting, with any normal variable rate, that is a rate that is not fixed or capped in some way, there is always the danger that rates can increase substantially.
Fixed rate mortgage
Fixed rate mortgages are fairly simple to understand, as the name suggests the interest rate is 'fixed' for a set period and will not alter, even if the variable rate increases drastically a fixed rate mortgage rate & payment will not alter.
Obviously if rates fall below the fixed rate line, you will not benefit from the lower payment, if you get one of the best fixed rates available however, most borrowers will be happy with this bearing in mind they know the mortgage payment will not change for a number of years.
During the times of the credit crunch and financial hardship, fixed rate mortgages are becoming ever more popular to help homeowners budget, safe in the knowledge that they know exactly how much is going to be going out each month.
Capped rate mortgage
Capped rate mortgages are similar to fixed rate with a touch of tracker thrown in!
A capped rate mortgage will allow the interest rate to fluctuate so if rates go down you will benefit from a lower monthly payment, however they have a set upper limit (a 'cap') that the interest rate will not exceed for a set period of time.
For instance, a 2 year 4.5% capped mortgage will allow you to benefit from the lenders standard variable rate if it's below 4.5%, but if the lenders variable rate exceeds 4.5% your 'cap' will kick in and your mortgage rate will not exceed 4.5% - you will effectively know the maximum your monthly payment will be over the capped rate period which, as with a fixed rate mortgage, this will aid budgeting and give peace of mind if rates increase drastically - again our mortgage professionals can guide you through the process and determine if a capped rate is best for you and your family.
