Know your rates
Once you are clear about the type of mortgage you want - repayment or interest only, choosing how you want to be charged interest is next.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The options are:
This is the one that moves up and down, mirroring the base interest rates set by the Bank of England. Lenders aren't tied to these rates, so can vary them. Your lender will set their variable interest rate higher than the base rate, usually 1% or 2% above it. If the base rate is 4.5% and your mortgage lenders' variable rate is 1.5% above it, you will pay 6% interest. Be watchful, as variable interest rates vary widely between lenders and they are not as competitive as other mortgage deals on the market.
This rate gives greater certainty, as your interest payments are guaranteed not to change for the duration of the fixed term, typically between one and five years. Occasionally you can find longer terms. At the end of your fixed rate term, the interest rate will usually revert to the lenders standard variable rate.
If interest rates fall below your fixed rate during the duration of the loan, you end up paying more than if you'd chosen the lenders variable rate. You may have to pay a reservation fee for the fixed rate, called an Arrangement Fee. If you change your mortgage during the fixed rate period, and sometimes for a period after it ends, you will usually have to pay the lender an early repayment charge.
These interest payments have a fixed maximum – a cap – that you will pay for a fixed term. If interest rates rise, yours will not exceed above this ceiling rate. You get a certain degree of protection if rates rise significantly, and if they fall, you pay less. The interest rate set for capped deals is often slightly higher than fixed rates.
This security can make it easier to budget for your monthly mortgage payment. At the end of your capped rate term, the interest rate will revert to the lenders standard variable rate. If you change your mortgage during the capped rate period, and sometimes for a period after it ends, you will usually have to pay the lender an early repayment charge.
You will receive a guaranteed discount on the lenders standard variable rate for a fixed term. So, if the lenders standard variable rate is 5.5%, with a guaranteed discount of 1%, you will pay 4.5% interest for a set period. Remember though that only the amount of the discount is fixed. The rate will still be variable so the amount you pay can still go up.
You may have to pay an Arrangement Fee to reserve the lenders' deal. If you change your mortgage during the discounted rate period, and sometimes for a period after it ends, you will usually have to pay the lender an early repayment charge.
Lenders will set their tracker rate at a certain margin above or below the Bank of England base rate, and move in line with it. If the base rate falls you will benefit financially, paying less in interest. But equally, you will feel the pain of rate rises. The base rate is currently at an historical low, and any future changes will almost certainly be upwards. This should be taken into consideration when comparing tracker rates against other products on the market. You can find tracker rates for a set number of years or for the life of a loan.
These aren't rates, but an incentive used by mortgage lenders to entice borrowers to specific mortgage products. On completion of your mortgage loan, the lender will give you an agreed sum, which could be as little as £100, up to £7,500, which you can use for any purpose. Lenders aren't in the habit of giving customers something for nothing. Rest assured, they will claw the cash back over your mortgage lifetime. If you switch in the early years this could be through an early repayment charge.
What to watch for:
- Any lender offering any special offer rates will do it for a reason. They are hoping that when the term ends, you'll stay with them out of loyalty, or simply forget to move mortgages.
- Watch out for deals that lock you into a mortgage contract for a set time, applying an early repayment charge if you want to switch mortgages. Some will apply a charge even after the introductory rate has ended. Look for deals with no extended early repayment charge.
- Also, make sure you factor any administration charges or reservation fees into your cost calculations, especially when remortgaging. These may offset any savings benefits you think you may get from a fixed term deal.
Mortgage interest rates change regularly, and so do the offers. For the fuller picture and to get a true idea of what your mortgage will cost in the long-term, get some advice from a qualified mortgage specialist. We can help make buying your property a more agreeable experience.
For mortgage advice you can choose how we are paid: pay a fee, usually 1% of the loan amount, or we can accept commission from the lender, or a combination of both, subject to a minimum of £960 if we are arranging the mortgage. For researching a mortgage only, a fee of £95 per hour for researching the market and making a recommendation to you will be payable at the time of recommendation. For example, if research took 3 hours our fee would be £285, with you applying to the lender direct.