Mortgage rates

What are the different rates of interest?

When borrowing money to buy your home, two basic interest rate will be charged on that amount.

Base rate and Lending rate

Your mortgage lender/provider will borrow money from the Bank of England to provide mortgages to you and others. The Base Rate is the interest rate that the Bank of England charges on these borrowings.

To simplify, the current base rate that the Bank of England is charging or set, is 0.5%.

When you borrow a certain for your mortgage, your mortgage lender/provider will borrow that amount from the Bank of England.

The 0.5%(base rate) will be charged by the BoE to your mortgage lender/provider, for that borrowed amount.

Your mortgage lender/provider will then add their own interest rate, this could range from 2% to 5% on top, to make a profit.

The end result means that your mortgage repayment will included both these charges.

Different Mortgage lenders will charge different rates to get you to sign with them, so its always wise to shop around for the best price.

Variable and Tracker rates

These interest rate changes with Bank of England borrowing(base) rate.

A Standard Variable Rate (SVR)

A Standard Variable rate is the most common type of mortgage rate.

This type of mortgage rate isn’t directly linked with base rate(unlike a Tracker rate, see below), but depends more on the Lenders own SVR(their Standard Variable Rate).

This means that its up to the Lenders how much they charge you on top of the base rate.

This is the default rate that borrowers will be charged once their period of fixed, introductory discounted, or tracker deals ends.

Things to consider about SVR:

• They are the most common type of mortgage, and therefore the most competitive. So look around as they often can work out the cheapest.

• Most people paying the SVR will not be tied to it and therefore won’t be penalised if they remortgage on to another deal. Again, look around to see if there is a more competitive deal available.

• There some high elements of uncertainty with a SVR as low interest rate currently climate won’t stay for too long, and if there is a significant rise in the base rate, borrowers might find it difficult to keep up with repayments.

Tracker mortgages rates

Tracker rates are so called because they are tied to and ‘track’ changes in the base rate. Therefore, if the Bank of England change the base rate, your repayment rate will follow to reflect that.

For example if the tracker mortgage is set at 1% above The Bank of England Base Rate for 5 years, and the base rate is currently 3.5%,  your repayment rate will work out at 4.5% on the amount you borrowed.

The benefits of being on a tracker mortgage is that any cuts in the base rate made by the Bank of England, will be passed directly onto you (unlike a SVR, where the lenders makes the choice of whether to pass such benefits onto their customers ).

But be warn as the opposite is also holds true, as any rise in the base rates will also be directly passed on.

To protect yourself from any huge rises in the base rate, you should consider getting a tracker deal with:

• no early redemption charge(so it is free to leave),

• the option to switch to another deal,

• or a cap on how high rates can go, so they won’t go above a set amount.

Fixed rates

Fixed rates are as the name suggest, fixed. The interest percentage that you agreed to pay with your borrowing, will remain the same for the length of your agreed period, and will be unaffected by any changes made by the Bank of England to the base rate.This period is normally between 2 to 5 years, sometimes longer.

Some things to consider when looking for a fixed rate mortgage:

• You want the certainty of a fixed monthly payment and not worry about fluctuating interest rate.

• A significant rise in interest rates could mean a rise in your mortgage payments, being on a fixed rate will protect you from any further rises in the future.

• You want to be able to budget for the next 5 years, and need to work out all your out goings.

• If interest rates falls, you will not reap the benefits as you will be locked in a deal with higher monthly repayments.

• Lenders will often charge a higher premium for guaranteeing a fixed level of interest. These deals often works out to be more expensive than variable rate mortgage.

• Fixed  rate mortgages usually incur a charge if you wish to leave before the time period is up.

Other type of mortgages

Stepped mortgages:

Stepped rate mortgages are less common these days, though some lenders still offers them. The different types are:

A Stepped up interest rate mortgage will start off with a big discount(smaller monthly payments), which then gradually reduces throughout the terms of the deals(higher monthly payments).

A  stepped down mortgage rate is the opposite, starting with higher monthly payments with  gradual reductions as you progress through the mortgage term.

A fixed step mortgage rate will offer both steps up and down but with the inclusion of knowing what the rate will be at each step change. This means that you will know how much the rate and  monthly payments will be at every steps going up or down.

A tracker step mortgage will have its rate tied to the base rate of the bank of England. This means that your payments will change accordingly along with the bank’s base rate, again stepping up or down.

Cash-back with a step mortgage is an incentive offer made by some mortgage companies to attract first time buyers. They will offer a percentage of the interest as cash-back to help the buyers with legal or moving fees.  These payments can range from a couple of hundreds to several thousands, though there will be restrictions on those significant amounts, such as not being able to use the cash-back to repay part of your loan, and you will probably be tied to the deal for a long period.

Conclusion – Which rate to choose?

If it looks like interest rates are likely to fall then it makes sense to opt for a variable rate mortgage.

If interest rates are looking to rise then it makes sense to choose a fixed rate mortgage.

However it is always difficult to predict, with any certainty, what will happen to rates in 2, 3 or 5 years time.

So a lot will depends on what you think will happen to interest rates.

A good idea is to do the research, watch the news, read the papers, search the Internet, to keep yourself updated so you’ll have the right information to make that final choice.