Mortgage Rates - fixed? capped? what does it all mean?
Residents or prospective home owners within the UK find themselves in one of the most ground breaking and competitive mortgage markets in the world. The state keeps out of the market completely, and almost all loans are financed by building societies, credit unions or property lenders such as banks.
The market was significantly deregulated in 1982 and since then there has been a substantial amount of innovation and an increase in the diversity of mortgage strategies by companies in order to attract clients. This is why a variety of mortgage types have developed and also why it is important to get independent mortgage advice
Since those who are lending the money get their financing from money markets or deposits, most mortgages slip into a variable rate; either the company’s standard variable rate or a tracker rate aligned to the repo rate of the BoE (Bank of England). At the outset, however, the following incentive deals may be offered in marketing mortgage deals; fixed rates, capped rates, discount rates, or cash back options.
A fixed rate provides a constant interest rate for a set period. This choice is more viable when taken out over the duration of more than five years (minimum) since the fixed rates over shorter terms become too high to make the deal worthwhile.
A capped rate refers to a similar agreement to the fixed rate, however with a capped rate the interest can vary beneath a certain level (the cap) while never exceeding the cap. It is not unusual for a mortgage of this type to include a “collar” in the deal, referring to a minimum interest level paid every month. Capped rates are usually offered over similar terms of duration to fixed rates.
A set margin of discount is found in mortgages utilising discount rateoptions. Typically this will give a discount (e.g. 2%) on the company’s standard variable rate, or as a discount on the added interest above the BoE rate. The discount rate can decrease or increase according to a preset pattern over the course of an agreed time frame.
The fourth option is to take out a cashbackmortgage, which means that a lump sum of the loan (say for example 5%) is advanced to you up front. This can prove useful in providing capital for repaying credit cards, loans or for refurnishing your new home. This deal usually comes with a standard variable rate or a tracker mortgage rate.
As if these rate differences are not confusing enough to the first time mortgage buyer, many mortgage plans combine rates, such as giving a four and a half percent fixed interest rate for the first two years, and then jumping across to three years at tracker BoE rates plus just under one percent interest.
One more point to take into consideration when calculating the repayment of your mortgage is the imposition of an early repayment charge if you pay off your mortgage sooner than the mortgage company anticipated. This is because many commercial mortgage companies offer rates lower than the market standard, and thus an early repayment charge helps the company regain potentially lost profit.