The first two considerations you have when arranging a mortgage are what type of mortgage rate is required along with how the mortgage will be repaid. The following article looks at the different mortgage rate options such as fixed rates, discounted rates, capped, variable and tracker rates, along with the main advantages and disadvantages for each option.

When considering which type of mortgage product is suitable for your needs, it pays to consider your attitude to risk, as those with a cautious attitude to risk may find a fixed or capped rate more appropriate, whereas those with a more adventurous attitude to risk may find a tracker rate that fluctuates up and down more appealing.

Following is a description of the different mortgage rate options along with a summary of the main advantages and disadvantages for each option.

Fixed Rate Mortgages

With a fixed rate mortgage you can lock into a fixed repayment cost that will not fluctuate up or down with movements in the Bank of England base rate, or the lenders Standard Variable Rate. The most popular fixed rate mortgages are 2, 3 and 5 year fixed rates, but fixed rates of between 10 years and 30 years are now more common at reasonable rates. As a general rule of thumb, the longer the fixed rate period the higher the interest rate. This is also applicable when considering the percentage loan to value, where borrowing below 75% of the property value will attract a lower fixed rate in comparison to an 85% or 90% loan to value which will attract a higher fixed rate percentage.

Advantages

Having the peace of mind that your mortgage payment will not rise with increases in the base rate. This makes budgeting easier for the fixed rate period selected, and can be advantageous to first time buyers or those stretching themselves to the maximum affordable payment.

Disadvantages

The monthly repayment will remain the same even when the economic environment sees the Bank of England and lenders reducing their base rates. In these circumstances where the fixed rate ends up costing more, remembering why the initial decision was made to select a fixed rate, can be helpful.

Discount Rate Mortgages

With a discount rate mortgage, you are offered a percentage off of the lenders Standard Variable Rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. The common mistake of those considering a discount rate, is to assume the higher the percentage discount offered, the better the deal. The key bit of information missing however, is what the lenders SVR is, as this will dictate the actual pay rate after the discount is applied.

As with a fixed rate, the longer the discount rate period the smaller the discount offered, and the higher the rate. Shorter periods such as 2 years will attract the highest levels of discount. In addition when considering the amount to be borrowed, the increased risk to the lender of providing a 90% loan will be reflected in the pay rate, with lower borrowing amounts attracting more competitive rates.

Advantages

Should the lender reduce their standard variable rate your interest rate and monthly payment will also reduce.

Disadvantages

When the lender or Bank of England increases their base rate, your mortgage payment will also increase. However in some circumstances lenders do not always pass on the full amount of a Bank of England base rate reduction.

Affordability of the mortgage at the end of the discount rate period should be considered at outset. There are no guarantees that follow on rates will be available, and so you should make certain that you are able to afford the monthly payment at the lenders standard variable applicable upon expiry of the discount rate period. Allowing for an increase in interest rates above the SVR would be prudent to avoid a ‘Payment shock’.

Tracker Rate Mortgages

Tracker rate mortgages guarantee to follow the Bank of England base rate when it moves up or down. Tracker rates are expressed as a percentage above or below the Bank of England base rate such at +0.5% over BOE base rate for 2 years.

The most popular tracker rate mortgages have been 2 and 3 year products, but there is now an increasing demand for lifetime tracker rates as borrowers are starting to realise that the Bank of England base rate has been reasonable competitive, and having a mortgage product linked to it could be beneficial in the long term.

Advantages

A tracker rate guarantees to follow the Bank of England base rate for however long the tracker rate is set up for. This means that as soon as the Bank of England cuts rates, a tracker rate mortgage guarantees to reflect the new lower rate and repayment.

The overall cost calculation of a Lifetime tracker rate can be significantly lower than taking shorter term mortgage products with the ongoing costs of remortgaging such as valuation fees, legal fee and lender arrangement fees. Lifetime tracker rates often have no early repayment penalty restrictions.

Disadvantages

The mortgage payment will go up if the Bank of England increases the base rate. Early repayment charges are likely to be applicable during the benefit period, and as with other types of mortgage rate are likely to be 6 months interest or 3% – 5% of the loan.

Variable Rate Mortgages

Variable rate mortgages are more commonly known as the lenders Standard Variable Rate (SVR), and are the rate that you come onto after the expiry of a fixed, discounted, tracker or capped rate mortgage. A variable rate is similar to a tracker rate in as much as the lender will base their SVR on the Bank of England base rate plus a loading of between say 2.5% and 3.5%. That is where the similarity ends however.

Advantages

The main advantage of being on the lenders Standard Variable Rate (SVR) is that there will be no early repayment charge for redeeming the loan in full. This provides a certain amount of flexibility when there is uncertainty in the market about where rates are moving. For those wishing to fix their mortgage rate, an SVR with no early repayment charge can provide the breathing space required to just wait and see before committing.

Whilst not always the case lenders do tend to pass on reductions in the Bank of England base rate through their SVR, and so those on the SVR will benefit from a reduction in the mortgage payment.

Disadvantages

Generally the SVR will be a higher rate of interest and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product. In addition, as has been seen in the past, some lenders do not pass on any or all of a reduction in the Bank of England base rate which results in a higher monthly payment in comparison to other mortgage options.

Capped Rate Mortgages

The capped rate is a variable rate mortgage which has a fixed limit to how far the interest rate can increase (the cap), and provides the option to know the maximum level of mortgage payment from outset. Capped rate mortgages offer the best of both worlds for those with a cautious attitude to risk, but who still wish to benefit from interest rate reductions. For example if the cap is set at 6% and the banks rates go below this rate, then your repayments will go down to reflect the reduction, with the guarantee that should rates go above the 6%, your payments will remain based on the maximum 6% because of the cap.

Advantages

If the Bank of England base rate falls resulting in a fall in the lenders standard variable rate below the level of the capped rate, then your monthly repayment will reduce. For many this provides the peace of mind and certainty for ease of budgeting offered by a know maximum monthly payment.

Disadvantages

Because a capped rate offers the best of both worlds to the borrower, the capped rate is usually uncompetitive as lenders need to price in the risk of rate reductions, leaving those such as first time buyers or those stretching their affordability, exposed to a higher rate than would be available with a fixed rate. This means that UK lenders generally don’t offer capped rate mortgages with any sort of competitive rate, preferring to market fixed rates instead.

Related posts:

1. Remortgages Proving Popular After Interest Rate Hikes
2. The Rise of Fixed Rate Mortgages
3. Variable Rate Mortgages, are They the Best Choice?

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Most homebuyers decide they want to be a homeowner and then go straight to see a mortgage consultant. That’s a mistake. If you’re interested in buying a home, you should “consult yourself” before you ever contact a mortgage consultant. When consulting yourself, the first action should be to assess your financial situation. Consider all of your monthly and annual expenses—household, education-related, child / spouse support, etc. Once you’ve tallied that, move on to calculating your monthly and annual income—salary, payments from investments, annuity awards, etc. Note savings and retirement investments but do not calculate them into your income tally. Keep in mind that this is not the time to sugarcoat things. The more realistic and honest you are in assessing your finances, the more you’ll understand precisely how much wiggle room you have in your budget. That will help you to determine the maximum mortgage payment you will be able to afford.

Next, take some time to research the type of mortgage loans that are available. Mortgages are generally classified as conventional or unconventional. Conventional mortgages require a minimum 20% down payment but unconventional mortgages allow buyers the flexibility to make a down payment of less than 20% – and sometimes nothing at all! While conventional loans have a fixed interest rate, unconventional loans may be fixed rate mortgages, adjustable rate mortgages, or a combination. Additionally, conventional loans have a 30-year loan term; unconventional loans can be for a few years or up to 40 years.

Finally, think about your plans for the future. How long do you plan to live in the home you’re planning on buying? Will you be buying a “starter home” that you only plan to live in for a few years or will you be buying a home that you plan to live in for the next 10 or more years? It’s important to know this when determining how much of a down payment you should pay. As a general rule, the longer you plan to stay in a home, the greater the down payment should be. Making a greater initial down payment will typically make you eligible for a lower interest rate and will decrease your overall costs in the long run. However, if you plan to stay in a home for just a few years, you won’t “get your money’s worth” if you place a hefty down payment. Why? You will not be as likely to earn the down payment back in the appreciation of the home.  Thus, in that situation, it’s a better financial decision to pay a smaller down payment and pay the higher interest rate.

So, how does all of this thinking, researching and assessing help you to know which type of loan is best for you? Well, a candid assessment of your financial situation will clue you in as to what is a feasible mortgage payment and using that amount, less about $100 to cover private mortgage insurance if it’s required, will allow you to calculate your target home price range. Meanwhile, knowing your plans for the future will help you to identify the types of mortgage loans that are ideal for you.

Once you have a clear picture of the type of mortgage that is best for the life you live and plan to live, it’s a good idea to become a student of the real estate industry. This means reading about the real estate trends in your area and studying the changes in interest rates. The goal is to predict what the real estate market will be like once you’re ready to place an offer on a home. Of course, you’ll also want to educate yourself on how to find a good mortgage consultant and what fees to expect when its time to close on your new home.

Related posts:

1. California Mortgage Loans for the Best Options
2. Know Your Belize Real Estate Property Options
3. Home Mortgage Rates Options

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The mortgage that you choose is going to affect every single aspect of your life. Look at it this way, if you are paying too much interest on your mortgage this means that you will not be able to take family vacations and it could mean you have to work more and spend less time with your family in general. For most of us this is an extreme sacrifice that we do not want to have to be making all the time. That is why it is so important that you choose the right mortgage when you are considering buying a new home.

If you choose a fixed rate mortgage you will never have to worry about the monthly payment changing over time. These payments will stay the same throughout the whole length of your mortgage. Even when other people get burned due to increases in the interest rates you will be safe with the same low rate.

On the other hand if the interest rates go down you will be left holding a high interest mortgage. That is why for some people the best choice is an adjustable rate mortgage. These usually start with a lower interest rate near the beginning of the mortgage but this rate doesn’t usually last for very long. As time goes on many homeowners find that their payments get higher and higher each month leaving them with little to no money left over for other things.

The important thing to remember is that no matter which kind of mortgage you choose, whether it is one of the two above or some other hybrid mortgage, there is hope even when the interest seems too much to bear.

If you have chosen an adjustable rate mortgage that is just getting out of hand as far as the interest rate is concerned then it is time that you spoke to your mortgage company about switching over to a fixed rate mortgage. When interest rates and inflation are only going up this is the best way to keep your money in your own bank account.

You should also look into refinancing your mortgage. If your current mortgage company is not willing to give you a new mortgage policy then perhaps it is time to go somewhere else. This is relatively easy to do. Contact other companies and see what they have to offer you in terms of interest rates. This is a good way to get the lower interest rate you need to be able to pay your other important monthly bills.

It is also vital that anyone who has a mortgage keep an eye on the market. If you do not know what is going on then you have no way of knowing when you are paying too much. It is up to you to find out what you could be paying as opposed to what you are paying at the present time. You can compare many different mortgage companies and their rates online whenever you feel the need. Take advantage of these types of tools and you could find yourself saving thousands of dollars each and every year.

Related posts:

1. How About an Adjustable Rate Mortgage
2. Considering Buying a Home – Be Aware of Current Mortgage Rates
3. Types of Home Mortgage Loan That You Should be Aware

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