Types of Mortgage and Interest Rates Explained
Your interest rate and your monthly payments are set for a period of usually 2-5 Years although you may choose to fix into a rate for a longer period if you believe the Base Rate is likely to increase. However, the longer the fixed period the higher interest rate you will end up paying.
At the end of that period you are switched to another rate, which is dependent on the market at the end of the fixed period.
Your monthly payments stay the same during the ‘Fixed’ period, even if the Bank of England base rate or lender variable rates change.
A fixed rate gives you the security of knowing your payments won’t change, making it easier for you to budget.
You won’t benefit if interest rates fall. The interest rate and your monthly payment will stay the same.
If certainty your monthly payments won’t rise is more important to you than the possibility of paying a lower interest rate a fixed rate product is a good product to consider.
This is a variable rate mortgage with an interest rate that is above, below or the same as a set index, usually the Bank of England base rate.
The Bank of England base rate is dependent on a number of economic factors and is the rate that commercial lenders borrow money from the Bank of England. Therefore as this rises, your payments will rise, as it falls, your payment will fall.
This allows the Bank of England to control important economic factors such as Inflation. At the end of that period you will move to another rate, usually one of the lenders variable rates.
It might be beneficial to choose a tracker if you can afford to pay more when interest rates rise so that you can benefit if they fall.
It may not be suitable if you live on a tight budget that won’t stretch to higher monthly payments when rates rise.
If the rate it is tracking falls, so will your mortgage payments. You will need to ensure you are able to make your monthly repayments if interest rates rise.
Lender Variable Rates
A rate that is set by the lender who decides when and how much to raise or reduce these rates.
Lenders usually have more than one variable rate, and your illustration and offer letter say which rate will apply to you.
These rates aren’t usually available as a stand-alone product as they are usually a rate the lender will switch you to at the end of your product rate period.
It can pay to stay on a lender variable rate if you can afford the monthly payments when interest rates rise so that you can benefit when they fall.
It may not be suitable if you live on a tight budget that won’t stretch to higher monthly payments when rates rise. If you’re happy that you’ll still be able to make your monthly repayments if interest rates rise.
If you’re happy that the lender chooses when and how much to change your interest rate by or whether you prefer your rate to track a rate set by Bank of England.