Types of Interest Rate
Types of Interest Rate Contract
With the vast range of mortgage products available it might seem that you can almost pick and choose the rate you want to pay. One of the ways in which we help you is to sort through them and find the right one for you. While the Interest Rate is part of that equation, it is not the whole story. The overall structure of the contract is also important. Broadly speaking all good offers have to be paid for in some shape or form, and the question is "do the advantages outweigh the disadvantages?"
Floating/ Standard/ Variable Market Rate - you borrow at the lenders normal rate of interest. No bells, no whistles, and, normally, no early repayment charges if you want to move. The rate will vary as the market changes.
A 'Tracker' (changes in line with specified rate) – follows a named interest rate in a fixed way – e.g. Bank Base Rate +1%. There may be Early Repayment Charges on moving, depending on the deal.
Loyalty Rate Mortgages - existing customers who meet the lenders criteria may be offered a discount to the Standard Rate.
Fixed Interest Rate - the rate is fixed at an agreed rate and for an agreed period of time. Your payments are not affected by either increases or decreases in the market Interest Rate during the agreed period.
When the Fixed Period ends you may be expected to stay with the lender and pay the full Standard Variable Rate for a further 1-3 years. If the lender has a reputation for being expensive with regard to its standard rates this would be something to take into account.
Early Repayment Charges can also be very high should you wish to break the agreement, and this is another area to assess. If you fix for 5 years and rates fall, you might want to switch to a lower rate. You are likely to find doing so very expensive, because of Early Repayment Charges.
Because no one knows what future interest rates will be Fixed Interest rates are best used when either they represent an attractive offer and way of saving money in the short term, and where the risk of losing out through downwards rate changes is one worth taking OR when you are concerned that rates may move upwards and that this would cause you serious problems with your budgeting
Discounted Interest Rate – You get a discount on the Standard Variable Rate for a given period – typically 2-5 years. If you decide to break the agreement, expect to face an Early Repayment Charge during the discount period, and possibly beyond it. Be sure you understand the charges before signing.
Capped Rates - these are mortgages that place an upper limit on your mortgage rate while still allowing you to benefit from reductions in interest rates. Early repayment charges will apply during the term of the capped rate.
Complex Offers - some schemes are quite complex, and what may be given on one hand (a low interest rate) may be taken back with the other (an application fee).
Offset Mortgages - these are mortgages where the lender offsets any interest on your deposits against the interest due on your mortgage.
They are very popular but they are not for everyone. However if you have significant funds on deposit, (which should not be invested elsewhere for the longer term), and the institution offers both a good deposit interest rate AND a competitive interest rate then the package can be attractive. We can assess this for you.
Special Cases - lenders are very inventive in what is an increasingly competitive market. The attractiveness of such offers would depend upon your situation.
All such offers need to be very carefully evaluated given your own particular circumstances. (For example a few years ago an Airmiles one was stunning value for a higher rate taxpayer doing lots of European flights on scheduled aircraft, but of little worth to the ordinary person who might have used them to go on a long haul holiday.)
Debt Consolidation - this can be ideal for the right type of person, which is someone who has gone through a tough time but is now financially stable and confident, whilst not being considered suitable for normal mortgages, for example they are self employed and have turned their business round, or they got into trouble after redundancy but now have a new and stable career.
But they can be a very expensive mistake indeed for the person who has a lot of unsecured debts to credit cards, car loans, utilities etc and who has not dealt with their fundamental problems. All too often they convert a bunch of creditors who would each accept a “whatever you can afford” payment into a single creditor who can, and will, force the sale of the house.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
Summary
Selecting the right type of interest contract is a complex area, and our role is to help you find the mortgage that suits your needs.