Types
of Mortgages.
In practice there are 5 main types of mortgages
as categorised by the different mortgage interest rates.
Discounted rate:
In the initial period which can be a few months to 3, 5
or more years the interest rate is reduced from the variable
rate. This has the advantage of keeping the interest low
in the early years of your mortgage. Some discounted rates
are “stepped” which means they increase with each subsequent
year of the mortgage term.
Fixed Rate:
These fix your interest rates for a set period which is
usually between the first 2-5 years, although longer fixed
rates of 10 or more years are sometimes available. The advantage
of a fixed rate is that your mortgage payment will stay
the same every month irrespective of movement in interest
rate and you will be protected when interest moves up. However,
should interest rate goes down significantly over the period
you will not benefit from the lowering of interest rate
as your rate is fixed. This type of mortgage helps to plan
your budget.
Base Rate Tracker Mortgages:
Base rate tracker mortgages are gaining in popularity because
the interest rate you pay is totally transparent. You pay
an agreed margin above the Bank of England base rate and
the interest rate rises and fall in line with the Bank of
England base rate. The attraction is that the interest you
pay is not subject to the whim of a lender who has a temptation
to move interest rate up as soon as rate rise occurs but
are much slower in passing any fall in interest rate to
borrowers and often only passing a portion of any rate decrease.Similar
to the Bank of England base rate tracker is the 'LIBOR'
interest rate. 'LIBOR' stands for 'London Interbank Offered
Rate' and is the rate of interest at which banks could borrow
funds from other banks, in marketable size, in the London
interbank market. Sometimes mortgages are quoted as a percentage
above the LIBOR rate.
Standard Variable Rate:
This is the standard interest rate of the lender and varies
in line with movement in interest rates. It is determined
by the lender and does not have to exactly mirror the Bank
of England base rate or the LIBOR rate. The standard variable
rate tends to be the highest rate offered by the lender
and the chances are you can probably find a lower rate if
you are on the standard variable rate by shopping around.
Capped Rate:
A capped rate places an agreed maximum interest rate ceiling
on your mortgage during the capped period. This means if
interest rate were to rise substantially you have the comfort
of knowing there your interest is capped at an agreed ceiling.
However when interest rate falls you will benefit from the
decrease. A capped rate sounds attractive in theory but
in practice is not particularly popular since the starting
initial interest you pay on a capped is significantly higher
than a fixed or discount rate as you effectively pay a premium
for capping the interest rate of your mortgage.
