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Interest Rate options
- Variable
rate
The rate generally goes up and down in line
with the Bank of England base-lending rate.
Often lenders calculate the variable rate as
the base rate plus an additional percentage
rate. The rate might go up and down as soon as
the base rate changes or less frequently, e.g.
once a year, reflecting interest rate changes
during that period.
Although the change is usually small
increments (maybe 0.25 percentage point), the
change may have significant impact on your
monthly payments over time.
Loans with a standard variable rate usually
have no completion or booking fees and no
penalties if you pay off or move the mortgage
early.
You
may need to look at a non-status (also known as
a self-certified) mortgage. There is often a
higher deposit required and a higher interest
rate - but we have access to the best
deals so this may not be significantly different
to most standard mortgages. And when your
situation changes, we can look at re-mortgaging
to find you an even better deal to meet your
unique needs.
- Fixed
rates.
The interest rate is fixed for an agreed
period. The rate is typically set for two to
five years, although it may be anything
between six months and 25 years.
Unlike variable rates, fixed rates let you
budget your monthly home expenses with
accuracy since you know how much you will have
to pay each month. You are also protected,
during the set period, from any increases in
interest rates, although equally, you will not
benefit from falling rates.
Lenders usually charge a booking fee to commit
to a fixed rate and penalties are incurred if
the loan is paid off early, or within the
redemption penalty period which may exceed the
fixed rate period
- Capped
rates.
The rate has a guaranteed maximum, or cap, for
a specific time period. This will protect you
from an unexpected rise in interest rates.
Unlike a fixed rate, if the lender's variable
rate falls below the cap, you will benefit
because your rate will decrease too, and if
interest rates rise, you will not be charged
more than the capped rate.
Lenders will normally set a higher capped rate
than their best fixed rate alternative at that
time.
- Discounted
interest rate.
The lender can guarantee a discount, normally
up to five per cent, off your interest rate.
This means the interest you pay will still
vary up or down but at a lower rate than the
general interest rate. Normally, this is for a
set number of years. Once this period has
expired, your mortgage will revert to the
normal variable interest rate.
Capital
Repayment
There are two ways of re-paying capital:
Monthly repayment:
Paying off capital as you go
Investment: Using
an investment to pay off the mortgage at the
end of the term. Either an endowment or ISA
portfolio.
The only way to guarantee that you will be
able to pay off the mortgage at the end of the
term is with a Repayment mortgage.
ISAs are more tax efficient than endowments,
with lower charges and pay lower commissions,
but you should buy a separate life insurance
policy if needed.
For a 25 year mortgage for an investment
oriented person is normally an ISA mortgage
with either a floating interest rate, or one
fixed for the first few years.
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