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Variable
Interest on variable rate mortgages moves up and down in line with the standard variable rate set by the lender. It's the rate applied to borrowers before making any adjustments for special offers available at any one time. A variable interest rate allows you to benefit from periods of low interest, but does not offer protection from periods of high interest.
Advantages:
- Flexibility within the mortgage market
- The option to move from lender to lender to take advantage of more competitive rates.
- Avoiding any early repayment charges, with the ability to benefit from rate cuts as they occur
Disadvantages:
- Generally the rate will not be competitive in relation to the market
- Exposure to interest rate rises
Suitability:
A variable rate mortgage is the most suitable option in a number of circumstances the most common being those identified below:
- Individuals borrowing money over a very short term
- Anticipation of repaying the loan early without incurring penalties on all or part of the loan
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Fixed
Your lender agrees a set rate of interest for a specified period of time. Irrespective of movements in the interest rate your monthly payments will not change. Generally anything between 1 and 25 year fixed rates are available. Commonly a lender will require a non-refundable up front booking fee to be paid on application to reserve the mortgage. Further fees such as arrangement fees are also frequently experienced with this type of rate.
Advantages:
- Knowing the exact monthly cost of your loan for a set period
- The rate will also provide a buffer against increases in the interest rates
Disadvantages:
- Unexpected increases in payments at term end
- Possibility of losing out should interest rates fall below your agreed rate
- Possibly tied in to variable rate with same lender for various periods following the fixed rate term end
- Redemption penalties can prevent restructuring of your mortgage and associated finances
Suitability:
A fixed rate mortgage is the most suitable option in a number of circumstances the most common being those identified below:
- Larger borrowings
- Individuals on tight budgets expecting wage increases over the first few years of the mortgage
- First Time Buyers looking for security during the first few years of setting up home
- Borrowers who anticipate rising interest rates
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Discount
A discounted rate works in exactly the same way as a variable rate, however during the initial period, or in some instances throughout the lifetime of the mortgage, the lender will offer you a discount off the standard variable rate.
Advantages:
- Reduces the monthly mortgage payment at the outset
- It allows other costs associated with house purchase to be catered for in the early months or years
- Allows borrower to take advantage of rate reductions
Disadvantages:
- Once the discounted period expires the rate returns to the variable rate meaning an increase in the monthly cost
- Larger discounts lead to larger increases
- Liable to early repayment charges which can be restrictive
- Exposure to interest rate rises
Suitability:
A discounted rate mortgage is the most suitable option in a number of circumstances the most common being those identified below:
- Larger borrowing
- For those who feel interest rates are will remain stable in the near future
- For those anticipating a salary increase in the near future
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Capped
Similar to fixed rates, a capped interest rate provides an upper limit through which the lender cannot increase the interest rate. A capped rate allows you to benefit from low periods of interest, unlike fixed rates, a capped rate can fall if a lender lowers their variable interest rates below the level of the cap set.
Advantages:
- Knowing the maximum monthly cost of your loan for a set period, allowing security within your budgeting
- Giving potential for a rate reduction, unlike the fixed rate mortgage
Disadvantages:
- Generally rates for capped mortgages will be higher than fixed rate mortgages available
Suitability:
Capped rate mortgage are suitable options in a number of circumstances the most common being those listed below:
- Individuals requiring flexibility in terms of rate decreases than fixed rates
- Larger borrowings
- Individuals on a tight budget expecting wage increases over the first few years of the mortgage
- First Time Buyers looking for security during the first few years of setting up home
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Flexible
There are a number of limitations to the standard types of mortgages available if your income is erratic, for example if you are self employed or perhaps working on short term contracts. Flexible mortgage rates overcome this problem by allowing the borrower to make both over and underpayments into the account. The interest is most likely to be calculated daily meaning that you will see an immediate impact of any overpayments that you make.
Advantages:
- Monthly payments can adapt to the level of monthly income you receive
- Interest is almost always calculated on a daily basis
- In the long term you should see a reduction in the amount owing quicker than with a standard mortgage providing you have made/are making overpayments, or your savings are being offset against the mortgage account balance as well
- With enough credit you can take a payment holiday
- Flexible mortgages may allow you to operate your mortgage account as a bank account
- The option to make withdrawals
Disadvantages:
- Generally you will be unable to obtain fixed, discounted, capped or cashback rates
- Lack of discipline in monthly payments could result in a badly managed mortgage account
Suitability:
The flexible mortgage option is suitable in a number of circumstances the most common being those identified below:
- Self employed or contract workers
- Individuals looking to make lump sum payments as a result of anticipated bonus payments or salary increase
- Borrowers with larger loans
- Those who wish to have speedy access to a pre-agreed credit limit
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Base Rate Tracker
Base rate tracker mortgages unlike ordinary standard variable rate mortgages, 'track' or follow the bank base rate set by the Bank of England. This means that all bank rate cuts are automatically passed on to the borrower. Lenders offer to link your payments to the Bank of England base rate for a set period of time.
Advantages:
- Generally, the rate charged will be lower than the variable rate applicable under a standard mortgage
- Any drop in the Bank of England base rate will be directly reflected in the monthly mortgage payments
Disadvantages:
- Any increase in the Bank of England base rate will be directly reflected in the monthly mortgage payments
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Current Account
This is a relatively recent addition into the marketplace allowing you to keep all of your money in one place. This includes your savings, current account, credit cards, loans, and earnings. The idea behind this type of mortgage is that all your money reduces the outstanding balance on your mortgage and as the interest is calculated daily, your interest payments are correspondingly reduced. The potential reduction in your level of borrowings means that over the entire term of your mortgage substantial savings can be made on your overall mortgage payments
Advantages:
- Keep track of all your money in the comfort of one account
- You may be able to pay the mortgage off early making your money work for you
Disadvantages:
- Interest rates are generally higher than a standard mortgage
- Fixed rates are not available for this product
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Cash Back
A lender agrees on completion of the mortgage to provide you with a cash lump sum. Normally a lender will require a non-refundable booking fee in advance to reserve this option. Borrowers will be required to remain on the lenders variable rate of interest for a pre-determined period of time. This can be linked to the amount of cashback provided.
Advantages:
- Can be used to replace any savings used as a deposit
- To provide some help for essential work to your new home
- Can be used to repay money borrowed for your deposit (e.g. family, friends)
Disadvantages:
- Associated early repayment charges are restrictive
- May be required to stay on bank variable rate for a long period after initial deal has expired
Suitability:
A cash back mortgage is the most suitable option in a number of circumstances the most common being those identified below:
- First time buyers
- Individuals utilising short-term finance arrangements to provide their deposit
- Borrowers confident that the mortgage rate is likely to fall
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Deferred
A deferred interest rate mortgage allows you to make lower repayments than the actual rate of interest charged for an agreed period of time. The difference between what you would have paid normally and the amount you actually paid, is then added to the capital sum of your mortgage.
This can be a very expensive way of arranging your loan as interest is charged on the deferred amount of interest in addition to the original capital borrowed
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