Mortgage Interest Rate Options

This section outlines the main interest rate options, namely:

• Discount rate mortgages
• Fixed rate mortgages
• Variable rate mortgages
• Capped rate mortgages
• Flexible mortgages
• Low start mortgages
• Deferred interest mortgages

Discount Rate Mortgage
In today's competitive environment, many providers offer an initial discounted rate. This takes the form of a limited period reduction in the normal variable interest rate by, say, 2% for a year or two. This means that whatever the variable rate is during that initial two years, the borrower will pay 2% less, thus making a saving. At the end of the discount period, the rate reverts to the lender's prevailing variable mortgage rate.

Some lenders even provide a cash discount to first time buyers on completion of the loan - also known as a "cashback".

Discounted mortgage are usually subject to early repayment charges if the borrower withdraws from the mortgage early.

Fixed Rate Mortgage
With fixed rate mortgages, the borrower can lock into a fixed repayment cost each month over an agreed period of time and know that, irrespective of changing rates of interest, monthly payments will not be affected. The fixed rate borrower can rest in the knowledge that his monthly mortgage repayment will not change for the agreed fixed period.

Most lenders charge an arrangement fee for the privilege of receiving a fixed rate. Many refer to this fee as a 'booking fee'.

The longer the fixed rate period, the higher will be the fixed interest rate. Fixed periods of one to five years are the most popular and most readily available. At the end of the fixed rate term, the interest rate usually reverts to the lender's prevailing variable mortgage rate. Some lenders, however, offer the borrower the option of a new fixed rate loan based on the prevailing rates at the time of renewal, with arrangement fees usually being waived on the new loan.

Variable Rate Mortgage
Variable rate mortgages have been available for many years. As the name suggests, the monthly repayment goes up and down in line with the lender's mortgage rate. This means that the borrower cannot predict the monthly cost of the mortgage from one year to the next. This can cause major budgeting problems in a period of increasing interest rates. On the other hand, when interest rates fall, there is less to pay. Many lenders do not alter the rate for existing borrowers until the year-end. With interest rates used as a regulator for the economy, mortgage interest rate change frequently.

Capped & Collard Mortgage
A capped and collared mortgage is a variable rate mortgage which has a fixed upper rate limit (the cap) and a fixed lower rate limit (the collar). This means that the borrower knows in advance the highest and lowest monthly payments that he may have to make. For example, if cap and collar rates are fixed at 6.5% and 3.5% respectively, the loan will be charged at the prevailing variable rate as long as this is not more than 6.5% or less than 3.5%.

Flexible Mortgages
A truly flexible mortgage allows you to make overpayments and underpayments, borrow back overpayments and, if you have built up enough credit, to take payment holidays. Another important feature is that interest is calculated monthly/daily, not annually in arrears, so overpayments have an immediate impact on what interest you pay. You can, therefore, significantly reduce the term of the loan and save thousands of pounds in interest payments if you are able to make additional payments during the term of the mortgage.

A flexible mortgage can be ideal for people with an inconsistent income, like the self-employed especially if the mortgage offers a mortgage interest offset facility or current account facility.

Low Start Mortgages
A low start mortgage is designed to help the borrower to keep down the cost of repayments in the first few years. Where the borrower opts for a repayment loan, a low start facility means that the monthly mortgage repayment does not include the capital installment for, say, two years. This means that the cost each month is reduced. However, a disadvantage is that the unpaid capital remains outstanding, so that repayments from year three onwards are that much higher.
(The Mortgage Warehouse (GB) Ltd does not arrange Low Start Mortgages)

Deferred Interest Mortgages
With a deferred interest (or deferred payment) mortgage, the provider, while charging interest on the entire mortgage, allows payment of part only of the interest due for an agreed period of time.

This means that the amount of capital that is owed actually increases. After the agreed period of time, the borrower starts to make payments on the enlarged total amount that he owes.

Basically, the borrower has deferred some of the initial payments to a later time. This type of loan is suited to someone who has a high expectation of regular income increases to their income over the coming years, such as a doctor in training.(The Mortgage Warehouse (GB) Ltd does not arrange deferred interest mortgages)

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