Now that you understand the various ways that a mortgage can be repaid, you need to look at the way the interest is charged on your mortgage. Your aim is to pay as little interest as you can on your mortgage, so interest rates are the most important part about buying a house. You need to decide which type of interest charging you want your mortgage to be so that it best suits your circumstances.
Standard variable rate A standard variable rate (SVR) mortgage is linked to the Bank of England's base rate. Therefore, it moves up and down in line with it. This means that when the Bank of England raises or cuts interest rates by a percentage point, typically your mortgage rate will go up or down by a similar amount. SVR mortgages mean that the amount you repay on your mortgage can vary, so while it may be affordable for you now, if the Bank of England rate increases steadily, so will your mortgage. It means that you have to be prepared to pay more for your mortgage. This is not good if you are on a tight budget.
Of course, it may go the other way and rates decrease, meaning your mortgage should follow suit! However, as there is no formal link between the base rate and a SVR mortgage, you cannot be certain that if the rate drops, so will the amount you pay! Fixed rates A fixed rate mortgage is where the rate of interest you have to pay is fixed for a set period of time. This gives you certainty as to how much your mortgage repayments will be every month - which is particularly useful if you are on a tight budget. However, the downside is that if the Bank of England base rate drops, your mortgage amount will stay the same. Homeowners who have fixed rate mortgage have the rate fixed for a set period - normally between 1 -5 years.
At the end of the period, their mortgage will revert to a SVR type. Discounted rates A discounted rate mortgage is where the lender gives you a discount on their SVR. So while the repayments will move up and down with fluctuations in the base rate, so will your repayments. But you will have an extra discount on top of it.
Tracker rates A tracker mortgage tends to run for the whole period of your mortgage, unlike discounted and fixed rates mortgages that run for a set period. How they work is that the difference between the Bank of England base rate and your mortgage rate is fixed. So, as an example, your mortgage might be set at 0.75% above the base rate. So, when the Bank of England base rate goes up or down, the tracker mortgage will do so to.
This is good if you want to ensure that a cut in the base rate will reflect on your mortgage repayments. Though, of course, they can up as well if the Bank of England base rate does too! Capped rates A capped rate mortgage ensures that there is a limit to the interest rate you will pay over a set period of time. So, if your lender's variable rate goes higher than the capped rate, you will benefit. If the variable rate falls below the capped rate, then you will pay the same as everyone else.
Capped rate mortgages are good when you are on a tight budget as you will know that your mortgage repayments will never go higher than a certain amount. Interest charging An important question to ask when choosing a mortgage, no matter what type of interest rate you decide to go with, is how frequently interest is calculated. You will pay much less in interest if you have a mortgage where the interest is calculated daily. This type of interest charging is sometimes called an Australian mortgage. If your mortgage is one where the interest is calculated monthly, you could wait a whole month after making a payment before the interest is recalculated. This means that you are paying interest on money that you don't actually owe any more! Which type is best? So, now you have had a crash course in mortgages! How do you choose the right one for you? Try comparing the monthly repayment figures quoted to you rather than looking at the interest rates on offer so that you get a true picture of what you would be paying.
And don't forget to take in to account any other costs like the mortgage application fee.
More information : http://www.360mortgage.co.uk http://www.mortgage-affiliate.co.uk http://www.bad-credit-remortgage-companies.co.uk James Miller is a freelance writer specialised in consumer credit, covering topics such as how to deal with bad credit, mortgages and insurance. He aims to help people navigate the financial industry.
