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Major Types of Mortgage Interest Rates a Potential Borrower Should Know

major-types-of-mortgage-interest-rates-a-potential-borrower-should-know

After you have chosen a mortgage, be that an interest-only mortgage or a repayment, you should decide on one of the main mortgage interest rates.

The first type is fixed rate mortgage. This option implies a fixed sum which you will have to repay your lender for a particular period of time irrespective of any changes of the interest rate at the market. Lenders tend to offer fixed interest rates for the period of time in the gamut from 2 to 5 years. Although, one should not give up on longer or shorter periods since it is still possible to find other options. When the “benefit” term is over, the fixed mortgage interest rate usually converts to the lender’s SVR (Standard Variable Rate).

The second option is capped rate mortgage which is quite similar to the first type. The difference is that if the variable rate happens to drop below the capped rate, a recipient of a loan will repay in accordance with the lower variable rate. Even in case the mortgage interest rates increase, the payments a borrower will have to make will never exceed the capped rate. Taking into consideration this overview, a potential borrower can conclude that a capped rate is better than a fixed rate if other factors coincide.

Types of Mortgage Interest Rates

The third kind worth paying attention to is discounted rate mortgage. This means that a lender can offer a discount to the initial pay rate on the SVR for a particular time term. For instance, a borrower can get a discount of 1.5% if the variable rate is 5%. However, one should keep on the alert as this discount can be linked to the standard variable rate. If this is so, a borrower’s payment sum will inevitably increase. This lets us conclude that this mortgage interest rates type does not provide budgeting certainty.

The fourth option is represented by the variable rate mortgage. In case you choose it, you will have your SVR payments decrease or increase according to your lender’s efforts to adjust the rate to the market conditions.

The fifth mortgage interest rates type is tracker rate mortgage. This variable rate is linked to the changes of a prevailing rate. The rate a borrower will be to pay is a fixed percentage amount which is higher than the relevant base rate and is active for a particular time term. For instance if the tracker mortgage is fixed at 1% above The Bank of England Base Rate for the period of 5 years and the base rate is 4.75% at the moment, the pay rate will total 5.75%.

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