Explanation of Types of Interest Rates/Mortgages
At Lothian Mortgage Services, we understand that all of the different mortgage terms out there can be confusing, that’s why we’ve come up with this guide to the various types of mortgages available.
Standard variable rate
This is the lender's variable rate, and they have the right practice to change it at their discretion. In rates tend to move in relation to funding cost and changes in the Bank of England Base Rate and competition in the market. As the rate rises and falls, so will your mortgage payments.
The rate remains variable, as above. However, as an incentive, you will be offered a discount off the standard variable rate for an agreed period, after which the rate charged usually reverts to the lender’s standard variable rate, which could be higher than the rate chargeable at the outset.
The lender will fix the rate of interest on your mortgage for a set period of time. During this fixed period your payments will remain the same, helping you to budget, After the fixed period, the rate charged usually reverts to the Lender’s standard variable rate, which could be higher than the rate chargeable at the outset.
The lender will cap the rate charged for a set period of time. Should the lender’s standard variable rate go above this capped figure, you will pay no more than the agreed capped rate. Should the rate fall below your capped rate then you will pay the reduced amount, until either the rate rises again or the set capped period ends. This provides you with the similar security of a fixed rate, in that you have a maximum interest you can pay, but also has the added advantage that you could pay less if rates fall. After the capped period, the rate charged usually reverts to the lenders standard variable rate, which could be higher than the rate chargeable at the outset.
This method of repayment is directly linked to changes in the Bank of England Base Rate. Tracker rates are set at a certain percentage above or below Bank of England Base Rate and this percentage difference is fixed – e.g. if the Bank of England Base Rate rises or falls by 0.25%, your Tracker Mortgage rises or falls by 0.25% also. They can sometimes be arranged on a fixed, discounted or variable basis.
London Inter-bank Offered Rate (Libor)
London Inter-Bank offered Rate, This is essentially the rate used by banks to lend to one another. The rate is reviewed periodically and therefore your mortgage payments will change accordingly: if the rate increases so will your mortgage payments and if there is a reduction your payments will decrease.
There are various types of flexible mortgages available which all provide increased flexibility, when compared to the traditional types of mortgages. Typically, a flexible mortgage may include some or all of the following features:
– The ability to make overpayments (without charges), subject to the lenders agreed limits.
– The ability to underpay your mortgage (subject to limits).
– The option to take payment holidays
– A facility to borrow more money (subject to limits), for lump sum expenditure, i.e. home improvements.
– Current account with cheque book and agreed overdraft facility.
– Credit card with an agreed spending limit
– Debit card (subject to limits)