Types of Mortgage Interest Rates to Choose from

There are several types of mortgage interest rates to choose from if you plan to apply for a mortgage in the United Kingdom. These are the standard variable rate, variable rate, fixed rate, and tracker rate. In addition, there are mortgages offered with a discount rate and capped rate.

A standard variable rate is offered by lenders to borrowers who choose a standard residential mortgage. It is a default variable rate type. With the variable rate type, the rate depends on the lender’s discretion. Borrowers who choose a fixed rate mortgage can rest assured that the rate will remain fixed or constant for a specified period of time. This period is usually between two and ten years. Mortgages that are offered with a longer term and fixed rate are often more expensive for the mortgage borrower. Not only is more money paid in interest but the mortgage may come with excessive early repayment charges. For this reason, short term interest rates are more popular among borrowers, compared to long term ones. Fixed rate mortgages are offered by many financial establishments in the UK, including NatWest, ING Direct, Nationwide, and others.

Another type of interest rate, which is a variable rate variety, is the tracker rate. As an alternative to fixed rate mortgages, this type of mortgage is popular among borrowers in the UK. The tracker rate basically follows the base rate of the Bank of England, as it changes in an upward or downward direction. The tracker rate is higher than the rate of the Bank of England, but it is also lower than variable rates offered by lenders. In may be set, for example, at one percentage point higher than the Bank’s base rate. When the base rate is set high, the tracker rate may be a fraction of a point lower than the base rate. The tracker rate is anchored to a prevailing interest rate, linked to the standard variable rates of lenders. It may be linked to different variable indices, for example, Libor, which is the rate set for banks to lend to one another.

The discount rate is another type of rate whereby the standard variable rate, which may be set at 2 percent, is discounted for a specified period of time. Most often, the period is between one and five years. The discount rate may be stepped as well, for example, it can be 3 percent during the first year, 2 percent during the second, and 1 percent during the third year.

Finally, there is the capped rate which bears similarity with the fixed rate, in that the interest rate cannot increase above a set cap. At the same time, it varies below the cap. If there is a collar linked to the capped rate, it will impose a certain minimum rate. The term of mortgages with capped rates is similar to that of fixed rate mortgages. It can be anywhere from two to five years.

Apart from interest rates, borrowers can choose from different mortgages, such as foreign currency mortgages, offset mortgages, right to buy mortgages, and a variety of others.

Mortgages Suitable or First Time Buyers

Mortgages suitable for first time buyers vary, but generally, the offers you will get (or won’t) depend on whether you qualify for a mortgage in the first place. The first question first time buyers should ask themselves is if they can afford to pay back the loan amount they want to borrow. UK banks help with this assessment by asking potential applicants to provide information about their outgoings and main source of income. Those who are self-employed should provide their financial statements for the last three years. Several factors determine whether you qualify for a mortgage and what types of mortgages you are likely to be offered.

Banks take into account your income, which is not limited to your guaranteed income, but covers all sorts of income. You can present various types of income, including bonuses, disability benefits, child tax credits, working tax credits, and foster care allowance. Other types of income to include are maintenance, overtime, and commissions, along with area, town, and car allowance. Financial outgoings are another factor, which determines the amount of money you can spend on repaying your mortgage loan. These include overdrafts, hire purchase agreements, loans, store cards and credit cards, and others. Household expenditures are also taken into consideration, including food and utility bills, transport and travel, living costs, and entertainment. Finally, even first time borrowers are required to offer a deposit, and the larger the deposit, the lower the interest rate banks offer. There are different types of accepted deposits. Banks accept deposits in the form of personal savings, inheritance, gift from a relative, and equity from the sale of property.

Depending on these factors, some mortgages will be suitable for your financial situation. For example, applying for a buy to let mortgage may not be your first choice, given that it is a semi-commercial mortgage offered to applicants who intend to let properties to tenants. Flexible mortgages, on the other hand, allow borrowers to make additional capital payments, with borrowers making underpayments as well. No penalty applies. Borrowers are also allowed to take payment holidays and to redraw on overpayments. With these features, flexible mortgages are suitable for the circumstances of first time borrowers who have a variable income or are self-employed. A specific type of flexible mortgage is the offset mortgage, common in the UK. The main feature of this mortgage type is that interest charged can be reduced by offsetting the balance against the loan. The lender then charges interest on the basis of the outstanding net amount. Some lending institutions offer a current account mortgage where there is one account for all transactions.

The self-cert mortgage is another mortgage type whereby lenders do not require proof of income, and first time applicants should not demonstrate affordability. The statement of earnings which the lender accepts is certified by the borrower. Another mortgage with which the applicant’s income does determine the borrowing is the non-status mortgage. Here, it is sufficient that the borrower states they will be able to pay back the loan.



Mortgages for Persons with Bad Credit

If you have a tarnished credit history, you may find it difficult to get approved for a mortgage. One solution is to look for bad credit mortgages, which are tailored to your individual circumstances. Bad credit mortgages, also called sub-prime mortgages and impaired credit mortgages, have been easy to access by borrowers in the UK […]

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Types of Mortgage Interest Rates to Choose From

There are several types of mortgage interest rates to choose from if you plan to apply for a mortgage in the United Kingdom. These are the standard variable rate, variable rate, fixed rate, and tracker rate. In addition, there are mortgages offered with a discount rate and capped rate. A standard variable rate is offered […]

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