FIXED RATE

 

The interest rate is fixed for a specified period, which can be from a few months to the full mortgage term. Repayments are not affected by changes in the prevailing variable rate, so if the variable rate drops below the fixed rate your repayments will remain the same. This type of mortgage gives you the security of knowing exactly what your repayments will be for the term of the deal. After the deal term the interest rate will normally revert to the lender's Standard Variable Rate. There may be financial penalties if you decide to change your mortgage during the fixed rate period or even for a while after the scheme has ended. Fixed rates are not about ‘winning’ or ‘losing’ – they are about protecting against an upward movement in rates.

 

VARIABLE RATE

 

The interest rate changes when the lender changes their lending rate. Variable rate mortgages are often recalculated annually. This means that any changes to mortgage interest rates are not reflected in your monthly repayments until the lender's recalculation date. Variable rate mortgages can be the lender's Standard Variable Rate or some other variable rate determined by the lender according to the particular product. A variable rate mortgage allows you to take advantage of any falls in interest rates, but this must be balanced against the risk of future interest rate rises.

 

DISCOUNTED RATES

 

The lender gives a discount from their Standard Variable Rate for a period of time, which can be from a few months to the full mortgage term. This type of interest rate is normally offered to first time buyers or people with high levels of equity. Generally, borrowers with a larger deposit will be offered a greater discount. Discounts can help soften the financial blow of buying a house, but means that after the discount period ends, repayments will rise sharply. Your repayments will fluctuate with interest rate changes but will remain at the set level below the prevailing rate for the deal term. There may be financial penalties if you decide to change your mortgage during the discount period or even for a while after the scheme has ended.

 

Stepped Rate

 

Stepped Rate mortgages come in various forms. They can be discounted for a number of years, with the discount rate reducing during the period, or even short-term fixed rates followed by a discounted period. Some schemes even offer a combination with a cash-back to help with moving costs.

 

Capped Rates

 

The maximum rate of interest you pay is fixed for a period of time. If the interest rate rises above the set capped rate, your repayments will remain at the capped level. If they drop below the capped rate, your repayments also fall in line with the lower interest rate. This type of interest rate gives a level of security should the base rate rise but also takes advantage of lower interest rates should they fall. After the deal term the interest rate will normally revert to the lender's Standard Variable Rate.

 

There may be financial penalties if you decide to change your mortgage during the capped rate period or even for a while after the scheme has ended.

Base Rate Tracker

The interest rate is variable but set slightly above the Bank of England Base Rate for a period or even the term of the mortgage. The interest rate fluctuates with bank base rate fluctuations and usually changes immediately following a bank base rate change. The biggest advantage of this type of mortgage is that, usually, there is little or no redemption penalty. This also means that interest can be saved on the mortgage without penalty by making overpayments.

 

Flexible Mortgage

 

This type of mortgage is relatively new. The interest rate can be discounted, fixed, capped or variable, but has the big advantage that it is calculated daily or monthly instead of annually. This means that any capital repayment of the loan will affect the interest charged on the outstanding balance immediately. By making regular overpayments, the interest saved on the mortgage over the term can be quite significant. Most lenders will also allow funds to be drawn from the account up to the original mortgage balance or even allow payment holidays.

 

To discuss the benefits of this flexibility please contact us to arrange a meeting.

 

CURRENT ACCOUNT MORTGAGE

 

A current account mortgage (often referred to as a “One Account”) is a combination of a flexible mortgage and a current account. The lender sets a maximum borrowing limit on the account, which includes the balance of the mortgage. As long as the borrower remains on course to repay the mortgage before they retire, they can increase their borrowings by withdrawing money from the current account. A cheque book is usually issued to facilitate this and money can be withdrawn for any purpose provided the maximum limit is not exceeded.

 

Lenders normally require borrowers to pay their salary into the current account each month and calculate interest on a daily basis. Any money paid into the account is set against the mortgage and any left over at the end of the month reduces the outstanding balance on the account. Providing the outstanding balance is reduced regularly, this would have the same effect as making overpayments on an ordinary flexible mortgage, therefore potentially saving thousands of pounds over the life of the mortgage.

 

This type of mortgage does not suit everyone – please call us to see if it meets your needs.

REPAY OR NOT REPAY

The traditional way of repaying your mortgage was to make equal monthly payments of capital and interest over the term of the mortgage. Repayments only changed if the lender’s mortgage rate changed. 

  

Endowment policies became a popular method of achieving repayment of your mortgage, in one amount at the end of the policy term. These were particularly attractive when insurance companies could offer attractive growth rates on the back of high levels of inflation and investment returns. Most people are aware that growth rates have not met expectations and many customers have been left with a ‘shortfall’ on their mortgage.

 

In recent years Pension Plans and ISA investment plans have replaced endowment policies. These are usually dependent on stock market performance to achieve the final repayment figure.

 

There appears to be a growing trend towards “Interest Only” mortgages, whereby the customer pays the lender a monthly payment that equates to the interest charge for that month. The good news is that this keeps your monthly commitment down to a minimum – the bad news is that the balance of your mortgage never drops below the original amount. However, most lenders will allow you to repay at least 10% of the mortgage balance each year – this is useful for people on variable incomes or where a bonus payment forms a large part of overall income.

 

You need to think carefully about how the mortgage will eventually be repaid. If an interest only mortgage appeals to you, come and see us to discuss how it fits with your personal circumstances.

                                                                                                                                                                                                       

We do not normally charge a fee for mortgage advice however, this will be dependent on your circumstances. If a fee is charged our typical fee is £250.



YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.