The first two considerations you have when arranging a mortgage are what type of mortgage rate is required along with how the mortgage will be repaid. The following article looks at the different mortgage rate options such as fixed rates, discounted rates, capped, variable and tracker rates, along with the main advantages and disadvantages for each option.

When considering which type of mortgage product is suitable for your needs, it pays to consider your attitude to risk, as those with a cautious attitude to risk may find a fixed or capped rate more appropriate, whereas those with a more adventurous attitude to risk may find a tracker rate that fluctuates up and down more appealing.

Following is a description of the different mortgage rate options along with a summary of the main advantages and disadvantages for each option.

Fixed Rate Mortgages

With a fixed rate mortgage you can lock into a fixed repayment cost that will not fluctuate up or down with movements in the Bank of England base rate, or the lenders Standard Variable Rate. The most popular fixed rate mortgages are 2, 3 and 5 year fixed rates, but fixed rates of between 10 years and 30 years are now more common at reasonable rates. As a general rule of thumb, the longer the fixed rate period the higher the interest rate. This is also applicable when considering the percentage loan to value, where borrowing below 75% of the property value will attract a lower fixed rate in comparison to an 85% or 90% loan to value which will attract a higher fixed rate percentage.

Advantages

Having the peace of mind that your mortgage payment will not rise with increases in the base rate. This makes budgeting easier for the fixed rate period selected, and can be advantageous to first time buyers or those stretching themselves to the maximum affordable payment.

Disadvantages

The monthly repayment will remain the same even when the economic environment sees the Bank of England and lenders reducing their base rates. In these circumstances where the fixed rate ends up costing more, remembering why the initial decision was made to select a fixed rate, can be helpful.

Discount Rate Mortgages

With a discount rate mortgage, you are offered a percentage off of the lenders Standard Variable Rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. The common mistake of those considering a discount rate, is to assume the higher the percentage discount offered, the better the deal. The key bit of information missing however, is what the lenders SVR is, as this will dictate the actual pay rate after the discount is applied.

As with a fixed rate, the longer the discount rate period the smaller the discount offered, and the higher the rate. Shorter periods such as 2 years will attract the highest levels of discount. In addition when considering the amount to be borrowed, the increased risk to the lender of providing a 90% loan will be reflected in the pay rate, with lower borrowing amounts attracting more competitive rates.

Advantages

Should the lender reduce their standard variable rate your interest rate and monthly payment will also reduce.

Disadvantages

When the lender or Bank of England increases their base rate, your mortgage payment will also increase. However in some circumstances lenders do not always pass on the full amount of a Bank of England base rate reduction.

Affordability of the mortgage at the end of the discount rate period should be considered at outset. There are no guarantees that follow on rates will be available, and so you should make certain that you are able to afford the monthly payment at the lenders standard variable applicable upon expiry of the discount rate period. Allowing for an increase in interest rates above the SVR would be prudent to avoid a ‘Payment shock’.

Tracker Rate Mortgages

Tracker rate mortgages guarantee to follow the Bank of England base rate when it moves up or down. Tracker rates are expressed as a percentage above or below the Bank of England base rate such at +0.5% over BOE base rate for 2 years.

The most popular tracker rate mortgages have been 2 and 3 year products, but there is now an increasing demand for lifetime tracker rates as borrowers are starting to realise that the Bank of England base rate has been reasonable competitive, and having a mortgage product linked to it could be beneficial in the long term.

Advantages

A tracker rate guarantees to follow the Bank of England base rate for however long the tracker rate is set up for. This means that as soon as the Bank of England cuts rates, a tracker rate mortgage guarantees to reflect the new lower rate and repayment.

The overall cost calculation of a Lifetime tracker rate can be significantly lower than taking shorter term mortgage products with the ongoing costs of remortgaging such as valuation fees, legal fee and lender arrangement fees. Lifetime tracker rates often have no early repayment penalty restrictions.

Disadvantages

The mortgage payment will go up if the Bank of England increases the base rate. Early repayment charges are likely to be applicable during the benefit period, and as with other types of mortgage rate are likely to be 6 months interest or 3% - 5% of the loan.

Variable Rate Mortgages

Variable rate mortgages are more commonly known as the lenders Standard Variable Rate (SVR), and are the rate that you come onto after the expiry of a fixed, discounted, tracker or capped rate mortgage. A variable rate is similar to a tracker rate in as much as the lender will base their SVR on the Bank of England base rate plus a loading of between say 2.5% and 3.5%. That is where the similarity ends however.

Advantages

The main advantage of being on the lenders Standard Variable Rate (SVR) is that there will be no early repayment charge for redeeming the loan in full. This provides a certain amount of flexibility when there is uncertainty in the market about where rates are moving. For those wishing to fix their mortgage rate, an SVR with no early repayment charge can provide the breathing space required to just wait and see before committing.

Whilst not always the case lenders do tend to pass on reductions in the Bank of England base rate through their SVR, and so those on the SVR will benefit from a reduction in the mortgage payment.

Disadvantages

Generally the SVR will be a higher rate of interest and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product. In addition, as has been seen in the past, some lenders do not pass on any or all of a reduction in the Bank of England base rate which results in a higher monthly payment in comparison to other mortgage options.

Capped Rate Mortgages

The capped rate is a variable rate mortgage which has a fixed limit to how far the interest rate can increase (the cap), and provides the option to know the maximum level of mortgage payment from outset. Capped rate mortgages offer the best of both worlds for those with a cautious attitude to risk, but who still wish to benefit from interest rate reductions. For example if the cap is set at 6% and the banks rates go below this rate, then your repayments will go down to reflect the reduction, with the guarantee that should rates go above the 6%, your payments will remain based on the maximum 6% because of the cap.

Advantages

If the Bank of England base rate falls resulting in a fall in the lenders standard variable rate below the level of the capped rate, then your monthly repayment will reduce. For many this provides the peace of mind and certainty for ease of budgeting offered by a know maximum monthly payment.

Disadvantages

Because a capped rate offers the best of both worlds to the borrower, the capped rate is usually uncompetitive as lenders need to price in the risk of rate reductions, leaving those such as first time buyers or those stretching their affordability, exposed to a higher rate than would be available with a fixed rate. This means that UK lenders generally don’t offer capped rate mortgages with any sort of competitive rate, preferring to market fixed rates instead.



Quick Property Sale

There are hundreds of lenders in the UK with countless mortgage offers and every mortgage lender guarantees low interest rates and excellent customer service. As all mortgage offers can’t be the best, how will you choose a right mortgage for yourself? Before proceeding further let’s first understand what is a mortgage? A mortgage is a loan procured by a buyer from a lender to pay for a house or a piece of a property. As collateral, the lender holds the ownership of the property, until the buyer repays the mortgage. Here are few tips on choosing the right mortgage:-

* Your Mortgage goal: Your mortgage goal will describe the amount of money you need, the monthly payments you can afford to pay, the repayment term and other fees. With multiple mortgage options available, it will also be wise to decide whether your want to go for an adjustable rate mortgage or a fixed rate mortgage.

* Shop around: Talk to multiple lenders specialising in mortgages. You can also choose to take the help of mortgage adviser in getting the right mortgage deal for you. Understand from him the various mortgage options. One renowned company, the Money Ferret can help you to get connected with qualified mortgage advisers to suit your requirements.

* Evaluate and Choose: Evaluate every mortgage option advised by the lender or the mortgage adviser. Is it satisfying your mortgage goal? Is it the right mortgage for you? If yes, then instruct your adviser or contact the lender and complete the formalities.

The Money Ferret aims to save you money by advising you on how to get the right mortgage. Their team of experts has more than 25 years of experience in the personal finance market. With thousands a myriad of mortgage loans from the full range of mortgage lenders, they understand that choosing the right mortgage, one that will best suit your requirements, is very difficult and time consuming. That’s why they help you get a qualified mortgage adviser who can help you find the right mortgage loan for you. The mortgage advisors are qualified to help you get the best deal on all types of mortgages. Whatever be your situation or credit history, they will make their best effort to get you the required mortgage on the best of terms and at lowest possible interest rates.



Rent Back

Choosing the right mortgage broker is important, as you want to make sure you save as much money as possible on the mortgage loan that you take out. Being picky about your mortgage broker is more than just a matter of trying to save a few dollars, though – the right mortgage broker will also help ensure that you get the best loan terms available to you, and that you will have someone that you can work with should any changes need to be made to your mortgage loan’s terms. Comparing mortgage brokers is not difficult, but it does require that you have a basic knowledge of what to look for in the mortgage loans that the different brokerages offer to you.

It is important that you understand exactly what a mortgage broker is, of course; unlike a traditional bank or mortgage lender who will offer you a mortgage loan directly, a mortgage broker will pair you with a lender that meets your needs and will act as an intermediary between you and the lender. Because of this you can often get a better deal on a mortgage through a broker than you would be able to directly, since they can do the “shopping around” for you. Different mortgage brokers may offer different rates and terms on the loans that they find for you, however, so it is still important to shop around and compare brokerages before choosing the one that is best for you.

Before you start to compare mortgage brokers, take the time to research the basics of mortgage loans online. Not only will this give you some useful information that can be used as a basis for your comparisons, but you may also be able to learn about mortgage options that you did not know about previously. This does not mean that you have to learn everything that there is about mortgage loans, of course; simply try to cover the basics of loan options, opening and closing costs, and interest rate plans. You may also wish to take the time to find out what the average interest rates in your area are as well as nationwide so that you will have a better idea of how good of a deal the rates that you are being offered are.

Once you have a basic grasp of the mortgage lending process, start looking for mortgage brokers who operate in your area. You should be able to find several using your local telephone directory or internet listings. The more mortgage brokerages there are in your area then the greater your chances will be of finding a good deal on the mortgage loan that you take out, since you will have a number of different options to choose from. Begin contacting each of the brokers that you find and request average interest rate and loan term quotes from each.

When you have collected quotes from a number of different mortgage brokers it is time to begin your comparison. Sort the quotes by the interest rate that is being charged, but make sure that interest is not the only factor that you look at. In addition to the interest rate that you have to pay there may be a number of other costs which can affect how good of a deal a particular mortgage is, and the terms of one mortgage offer may not be as flexible as those of another. Sorting quotes based on interest will at least give you an idea of where the various offers stand based on one of the most obvious factors of the mortgage, however, and can also make it easy to eliminate the offerings of any broker whose rates are much higher than the others.

You may also list the points next to each loan’s interest rate. Points are a percentage of the loan you pay either at closing or rolled into the mortgage principal that acts as a “buy down” of the interest rate. For example, a rate that is 1% lower than a comparable loan may have 1 to 3 points attached to it whereas loan number two has zero points. Depending on the amount you are borrowing, one of these loans may be less expensive than the other. Your particular situation will determine which has the lower overall cost.

Begin comparing the quotes that you have received based on the estimated monthly payments you will have to make, opening and closing costs, and any specialized terms or conditions that certain mortgage quotes might have. Read through the quotes of the mortgage brokers several times to make sure that you have all of the information that you need for your comparison, and begin removing quotes from consideration when you find them to be more expensive or to have more strict terms than some of the other quotes. Continue reducing your potential mortgage loan quotes until only two or three remain so that you can compare them more closely before choosing a mortgage broker. Once you have finished the comparison you should have an idea of the broker who will find you the best deal on your mortgage so that you can then begin the process of getting the exact loan that is right for you.



Passive Income