Bamboozled By Mortgage Interest?
When you start climbing on to the property ladder, sorting out a mortgage can be a daunting task. There are numerous types of mortgage to choose from, and you need to make sure you get the right one. Within each type of policy, there are myriad options to go through before committing to such a huge loan.
Once you have settled on the right mortgage for you, there is the issue of interest. Which option you choose will depend on your circumstances, but going to see a lender armed with the basic differences will give you confidence that you are getting the best deal for you. Here’s a quick guide to paying interest on your mortgage. So if you’ve ever wondered what on earth it all means, read on…
Fixed Rates
With a fixed rate mortgage, you agree with the lender on a set period of time – usually between two and five years – during which the interest will not change. The benefit here is that you will not suffer an increase if rates go up. Similarly, you won’t benefit if rates go down, and discontinuing with the policy will mean you face penalties. Tempting though a low, fixed rate interest plan may seem, you must check how long you are expected to stay with the lender before you can leave without penalty.
Variable Rates
The amount you pay for your mortgage alters in line with national interest rates. Normally, the interest reflects the changes in the base lending rate of the central bank; this is decided at monthly meetings of the Bank of England’s monetary policy committee (MPC). Every time the MPC raises its rate, the lenders do too. And when the MPC lowers its rate, the lenders follow suit.
Capped Rates
The idea behind capped rates is to offer the best of both fixed and variable rates. A “cap” is set on the interest so that it will never rise above that level, but if national rates fall, your interest will go down accordingly. The benefit of these is that you know the maximum amount you’ll be paying. However, the capped rate is not generally very competitive.
Discounted Rates
Discounted rates will fluctuate in line with the lender’s variable rate, but are obviously cheaper to tempt customers in. After the discount term has ended, the rate will go to the normal variable rate.
Banks and companies offering mortgages are now required to supply customers with a key facts document that provides all relevant information relating to the loan, and clearly sets out the total cost of the loan, not just the interest.
Whichever mortgage you choose, make sure you thoroughly research every option and compare lenders. You are, after all, bound in to the agreement for a long-time, and it’s sensible to make sure you get it right first time as switching lenders can incur hefty penalties.
Among those offering the best mortgage rates is Alliance & Leicester. Meanwhile, take a look at Fish 4 if you’re on a property hunt.
