Fixed Rate Mortgages
With a fixed rate mortgage the rate of interest is set for a number of years – usually 2, 3 or 5 years but longer fixed rates are available.
The benefit is that you will know exactly what your payments are each month for the length of the fixed rate period no matter what happens to interest rates.
When the fixed rate ends you will be put on the lender’s standard variable (SVR) which will likely have a higher interest rate than you have been paying. However you will be able to apply for another rate deal either from your current lender or remortgage to a new lender.
The potential downside of a fixed rate is that if other mortgage rates goes down you will be stuck on the higher rate. You can get out of the rate but there will be an early repayment charge payable if switching before the end of the fixed rate period.
Tracker Rate Mortgages
A tracker rate moves in line (tracks) with a nominated interest rate which is usually the Bank of England base rate. The rate you pay will be a set interest rate above or below the base rate. If the base rate goes up or down then your rate will vary by the same amount.
Some lenders do set a minimum rate below which your interest rate will never drop but there is usually no upper limit.
Discount Rate Mortgages
A discount rate is a variable rate but you will benefit from a discount off the lender standard variable rate (SVR) for a set period typical between 2 and 5 years. Your monthly payment will go up or down whenever the lender changes their SVR.
Capped Rate Mortgages
A variable rate mortgage but with a ceiling (a cap) so you know that your rate will never go above a set interest rate level.
This gives you the comfort of of an upper limit to mortgage payments but if rates goes down you would also benefit.
With mortgage rates over the last few years being at low levels there is not been many capped rate on offer from lenders.
Not sure what rate is best for you?
Unsure if you are best to take out a fixed or tracker rate?
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