Mortgage Interest Rate types available for the First Time Buyer...
First Time Home Buying Guide - Page 8 of 11:
Despite the credit crisis, or credit crunch that globally affected the financial institutions in late 2007, the UK Mortgage Market is a thriving and sophisticated conglomeration of innovative mortgage products - a far cry of the mortgage market place prior to the inception of the Financial Services Act of 1986, where the building societies ruled the roost, and dominated the industry.
Naturally, a professionally qualified Shire Direct Mortgage Advisor will be able to advise and recommend a suitable mortgage package featuring a mortgage interest rate type that will suit your circumstances, needs and aspirations.
In order to clarify the mortgage products that may be available to you, we have listed some of the main mortgage types that can be found in today's ever-changing mortgage market place.
- Variable Rate
Variable rate mortgages are probably the most common of all mortgages. They are often referred to as Standard Variable Rate mortgages or SVR. The interest rate charged will go up and down, broadly in line with interest rates in the economy as a whole during the term of your mortgage. Basically this means that when the interest rate goes up, the amount you have to pay also goes up. Similarly, when the interest rate falls, your payments come down. Some lenders offer a way of levelling out interest rate changes over a year. The interest rate charged goes up and down in exactly the same way, but it does make it easier to budget for the year ahead. Variable rate mortgages may incur early repayment charges, but we will of course advise if these apply.
- Capped Rate
A capped rate mortgages is a variable mortgage with a difference. Your mortgage rate will still go up and down, but you have the security of knowing that when interest rates go up, it will not exceed a certain figure. This is a "capped rate". The capped rate will usually feature at a specified rate for a specified period of time. Arrangement fees and Early Repayment Charges (ERC's) will often apply with this type of loan.
- Fixed Rate
A fixed rate mortgage provides a guaranteed rate of interest for an agreed period of time. This can be very comforting if you have a large loan, or if your budget is particularly tight, because it guarantees that the payments won't rise during the fixed rate period. However, if interest rates fall, your mortgage payments will remain the same until the end of the fixed term. It is therefore prudent to think carefully about how long you want to be locked into the same rate.
Many mortgage lenders offer fixed rate periods spanning 1-10 years, or even longer! When the period ends, the mortgage usually reverts back to the standard variable rate (SVR). Some lenders may offer another fixed rate option, usually for an arrangement fee, although will be unable to say in advance what the new rate will be. You should be aware that fixed rates can be expensive if you want to switch to a different type of loan, or repay your mortgage during the fixed rate period, as most lenders will levy Early Repayment Charges (ERC's). These charges sometimes apply even after the fixed term preferential period has ended.
- Discounted Rate
Some lenders offer a discount on their normal Standard Variable interest rate (SVR). This will usually be for a limited preferential period, and will be offered at the outset of the loan. At the end of the discount period, the interest rate simply reverts to the lender's Standard Variable Rate (SVR). Again, you should be aware that an Early Repayment Charge (ERC) will usually apply if you pay all or part of the mortgage off during the preferential period of the mortgage. Visit our Mortgage Glossary page on Discount Rate mortgages for more information.
- Flexible Mortgage
There is a range of mortgage plans available that will allow you to vary or even suspend payments for periods of time. With flexible mortgages, you can also pay in extra amounts to reduce your outstanding loan, and in turn this will build-up a reserve you can drawdown in the future. Interest is usually calculated on a daily basis, so the benefits of any overpayments are immediate. However, some lenders calculate interest monthly.
The use of the overpayments feature means that you could end up saving a significant amount of interest on your mortgage over the years, and it is likely that you will pay your mortgage off early! The flexibility of being able to stop payments for a while may also be helpful, especially for example if you've just had a baby, and the family budget may be tight!
The following pages look at the features that are usually contained in Flexible Mortgages
- Base Rate Tracker
Interest charged on a Base Rate Tracker mortgage is determined by reference to a "Base Rate", e.g. the Bank of England Base Rate, the Finance House Base Rate, Building Society Base , LIBOR (London Inter Bank Offered Rate etc.
The interest rate chargeable will usually be calculated by adding an interest rate "margin" to the appropriate Base Rate. The margin will generally depend upon the attractiveness of the application to the lender. Thus if the Base Rate used was say 6.5%, and the margin was set at 2%, then the interest rate charged would be 8.5% (i.e. 6.5% + 2%).
The margin will usually be fixed for the mortgage term, whereas the Base Rate will of course fluctuate, broadly in line with the economy as a whole. Some lenders may offer a combination of other features with this type of plan, including fixed or discount rate options. Arrangement fees and Early Repayment Charges (ERC's) may often be charged on this type of plan.
- Cashback Mortgages
Some lenders offer a small "Cashback" plan where a fixed amount, for example £500, is paid to the borrower either on, or shortly after completion of the transaction. These schemes can be particularly attractive to first-time-buyers who may have only limited savings, and who may find this assistance to be helpful in meeting their costs of purchase.
The true Cashback mortgage will offer a percentage of the amount of mortgage borrowed to be paid back to the borrowers on completion of the transaction. Some of the Cashback amounts can go up to as much as 10% of the mortgage advance, and thus where a borrower has arranged mortgage funding of (say) £250,000, at 10% the borrower may receive a cashback of £25,000.
This type of Cashback Mortgage is usually operated on a Standard Variable Rate, and will naturally incur an Early Repayment Charge (ERC) in the event of full or partial repayment of the loan during the tie-in period, which is likely to be a minimum of 8-10 years if the Cashback amount was as much as 10%.
- Offset Mortgage
An offset mortgage takes the form of a flexible mortgage, but extends the scheme to provide the ability for the borrower to offset their credit balances on their current and savings accounts, against their mortgage debt, provided of course that the customer transfer these accounts to the lender.
Thus, for example, if you have current account balances of (say) £2,500, and savings of £10,000, the lender would offset the sum of £12,500 against your mortgage of (say) £100,000. In this case, you would only pay interest on £87,500, (£100,000 - £2,500 - £10,000). As a result of the reduced interest you pay as a result of this arrangement, your mortgage term would be shortened, as would the interest you repay.
This scheme is especially useful for Higher Rate Taxpayers as whilst you will not receive interest payments on the amount that you have offset by the credit balances on your current and savings accounts, neither will you have to pay tax on that interest either!
It's also important to remember that the amount of interest payable that you are sacrificing on your current account and saving account balances would have been at a much lower rate than the mortgage interest charges you will be saving by offsetting. For example, savings may attract a rate of (say) 3.0%, whereas the interest charged could be as much as (say) 7.0% in comparison. In short, you will benefit by 4.0% - and have no tax to pay, and if you are a High Rate Taxpayer, the difference, when grossed-up, could be worth as much as 6% in your favour!
There's much more information on the various types of mortgages that could be available to you throughout our website, so why not have a look at the following pages:
There's also more detailed explanations of some of the various rates that could affect the mortgage. Why not have a look at these pages:
Why not also take a look at our Essential Guide to Mortgages.
And you might also find the following help and information pages to be quite useful...
In the next part of our essential First Time Home Buying Guide we'll explore some of the options and innovative mortgage plans available to help the first time buyer get on the property ladder.
First Time Home Buyer Options NEXT ›
The overall cost for comparison is 9.8% APR.
The actual rate available will depend upon your circumstances. Ask for a personalised illustration. APR variable and based on a usual case. Most customers are likely to receive a lower rate or the same rate as our overall cost for comparison rate - learn more about APR.
There are no upfront broker fees.
However, a fee may be charged on successful completion. An indication is that on conforming cases (straightforward applications with no or minimal adverse credit) a fee may be charged of up to 1% of the amount advanced, typically £795 and will depend on your circumstances.
For non-conforming cases (where case research and processing may be more complex due to adverse credit or unusual circumstances), a fee may be charged of up to 3% of the amount advanced, typically £1,995.
THINK CAREFULLY BEFORE
SECURING OTHER DEBTS AGAINST YOUR HOME.
YOUR HOME MAY BE REPOSSESSED
IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
Adding existing debt to your mortgage will increase the repayment term and overall cost.
