Getting a cheap, low interest
rate mortgage online in the UK means you are suddenly
surrounded by jargon. Use this guide to untangle the terms
and steer your way to a really good, low rate mortgage.
Fixed rate mortgages
Fixed rate mortgages
guarantee a specific rate of interest for
a set length of time. Most commonly, this is for between one
and five years, though it can be as long as ten or even fifteen
years. As a rule, the longer the fixed period, the higher
the starting rate of interest. A lender will not want to commit
to lending you money at a really low interest
rate for ten years when there is a fair chance that during
that period the general level of interest rates
may rise above the rate at which they are lending your mortgage.
Low interest rates are often found with deals that
are fixed for two to three years.
Capped rate mortgage
As with all variable rate mortgages, the
rate follows the lender's SVR up and down. The difference
with this type of mortgage is that the rate is guaranteed
not to go above the level at which it is 'capped'. This type
of mortgage is cheap in times of steadily
rising interest rates.
With a discounted rate mortgage, the Standard
Variable Rate is temporarily reduced by a set amount for a
specified period. This usually ranges from one to five years.
Once the discounted period is over, you then revert to paying
the prevailing Standard Variable Rate. With this type of mortgage,
it is the discount that is fixed and not the actual rate.
Variable rate mortgages
As you would expect from the name, variable mortgage
rates go up and down and generally don't stay at
the same level for too long. This is because the interest
rate and subsequent level of repayment varies with the lender's
interest rate. In the UK this is usually derived from the
Bank of England base rate. On the continent
the index is often derived from the prime bank base rate -
an average of the rates of several leading lenders.
Tracker mortgages in
the UK are usually linked to the Bank of
England base rate, in that you pay a set margin above the
current base rate level. Unlike many of the other types of
rate, most tracker rates will not revert to the SVR at any
point during the life of the loan. They will continue to track
the base rate until you have either paid off your mortgage
or switch provider or product. You can also get tracker mortgages
that have discounts and stepped discounts built into them.