Different types of mortgage Interest rate options
There are many different Mortgage interest rate options and when you are considering your mortgage options you should not only consider the interest rate you will be paying when you first take out your mortgage but also what the rate could be in 1/2/3 years time based on the type of mortgage you have taken out.
There are two main categories of mortgage interest
- Fixed rate – You are charged a static rate of interest for the duration of the Fixed term, this is usually 2, 3 or 5 years.
- Variable rate – Your interest rat and as a result your monthly payments can vary.
Fixed rate Mortgages
You will be charged a static monthly amount for your mortgage for the duration of the deal. So a 2 year fixed rate mortgage, fixed at 3.5% on a mortgage value of £150,000 (over 25 years) means that for two years you will be charged 3.5% interest on your mortgage, your monthly payments will be £751 for 2 years no matter what happens to interest rates during that time.
- Peace of mind – for the duration of the deal you will know exactly what your monthly outgoings are going to be, in relation to your mortgage anyway.
- Higher Rate – interest rates are likely to be slightly higher that a variable rate mortgage, unfortunately peace of mind comes at a price…
- If the interest rate drops you will not see your mortgage payments drop as you would on a variable you are fixed on that rate for the duration of the deal.
Make sure you fully understand
- You may be limited by a cap on over payment during any 1 year of your term, usually around 10% of the value of the mortgage.
- There are usually charges to leave the deal if you have not completed the deal, this can amount to several thousands of pounds so you really need to know what terms are imposed.
- Once your deal has finished you will normally switch to the standard variable rate for the mortgage company you are with this is likely to be higher than you are used to paying. you need to ensure you have contacted your mortgage broker at least three months before this to ensure another deal can be found before your current deal ends.
Variable rate Mortgages
Your interest rate can change at any time with a variable rate mortgage, hence the name, due to this uncertainty with your monthly payments it is always advisable to ensure that you have enough money set aside to cover your increased payments should the rates rise. You may be lucky enough and have the rates go down, however for peace of mind you need to cover possible increases.
So a variable rate mortgage, at 3% on a mortgage value of £150,000 (over 25 years) means that your monthly payments will be £711. if the rate goes up by 1% you will see your monthly payment increase to £792, on the other hand if the rate goes down by 1% you will be paying £636.
There are many types of Variable rate mortgage we have more information on them here:
- Lower rate – generally a variable rate mortgage has a lower initial rate than the current fixed rate options
- Lower monthly cost – lower rate means lower monthly mortgage payments
- Flexibility – because you are not tied in you can change track on your mortgage at any time, (subject to the terms and conditions of your individual mortgage)
- Potential rate increases – you may find yourself paying significantly more than you expect if the rates increase
Make sure you fully understand
- Interest rates fluctuate, and the bank may decide to alter their base rate this can significantly increase your monthly payments.
- You are not tied in so you can go onto a variable rate for a while and see how it goes, you can always take a safer fixed rate at a later date.