plonkee money an english-er's thoughts on personal finance

June 28, 2007

all about mortgages: interest rates

Filed under: house — plonkee @ 4:36 pm

The amount of money that you eventually pay back on your mortgage is determined largely by the interest rates (its also influenced by whether you use a repayment or an interest only mortgage) . There are several different ways in which the level of interest might be set on a mortgage.

Variable Rate

This the mortgage companies plain vanilla option. The interest rate on the mortgage varies on the whim of the mortgage company. Usually it goes up when the Bank of England base rate goes up, and goes down when the Bank of England base rate goes down, but it doesn’t have to and there is often a lag – particularly if the base rate goes down.

Tracker

This is a mortgage that explicitly tracks the Bank of England base rate, moving up or down in step. It is usually marketed at a certain percentage above or below the base rate, and may be offered for a fixed period of time (then reverting to a variable mortgage) or for the life of the mortgage.

Fixed Rate

This is quite a simple one. The interest rate on the mortgage is fixed for a set period of time. Fixes that are available range from 6 months to 25 years. Of the 2043 different fixed mortgage products that I found on moneybackmortgages, though 1986 were for terms of about 5 years or less – the market for a short term fix is very competitive in the UK, but not at all for a long term fix. There is generally a penalty for repaying the mortgage during the fixed period and sometimes afterwards. Once the fixed period ends the mortgage usually reverts to a variable one, but occasionally to a tracker.

Discount

This is simply the mortgage companies variable rate with a discount on the interest rate. So if the variable rate is say 6.99%, the discount rate might be 2.99% (a 3% discount). If the variable rate increases, say to 7.5%, then the discount rate increases to 4.5%.

Capped and/or collared

A mortgage is capped if the interest rate can rise but not above a certain level. It is collared if it can fall below a certain level. For example the mortgage may be offered at 6%, capped at 7% and collared at 5.25%. This means that the interest rate can vary at the will of the mortgage company, but will never go above 7% or below 5.25%. Mortgages are usually capped and/or collared for a fixed period of time and then revert to the standard variable rate.

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