The UK mortgage market is diverse with many products available from a wide selection of lenders. This article is to outline the different types of mortgage rates available, how they work, the benefits and drawbacks of each one. There are 5 main types of rate available in the UK; these rates are available to first time buyers, home movers, people looking to
remortgage and for buy to let property investment mortgages. You can take these rates for both interest only and repayment mortgages.
A fixed rate does exactly what is says, you can fix the rate of your mortgage for a period of 2, 3, 5, 10 or even 25 years. The main reasons why people take fixed rate mortgages is that you can budget easier, knowing exactly how much you have to pay towards your mortgage for years in advance. The benefit of having a fixed rate is that if interest rates where to go higher you will be protected from this until the fixed rate period ends. The down side to fixed rates are that if rates where to go lower you would not benefit from this at all.
Tracker rates are rates that directly follow the bank of England base rate. The Bank of England decision is the first Thursday of every month at 12.00. The benefits of taking this type of mortgage are that if rates where to go lower you would benefit from this immediately and save money on you
mortgage each month. The down side to these rates are that if rates where to suddenly start going up, your monthly payment would go up with it.
Standard Variable rate, this is the rate that all banks use to set their profit margins, each bank has its own rate and they can adjust them as and when they want. They are normally adjusted after a bank of England decision; however it is up to the lender if they want to pass on any rate drops.
Cap and Collar, The cap is put in place to stop rates going higher, the mortgage rate will track along at this ceiling until rates start to fall. The opposite of this is the collar where if rates where to fall you would track down until you hit the collar. Your monthly payment would then track the collar until rates started to climb again.
Discount Rates, A discount rate is where the lender will offer you a discount from the current standard variable rate, so they are similar to tracker rate mortgage except they follow the lenders standard variable rate and not the Bank of England rate. There is a big difference and one should always check the small print before signing up.
So there you have the five main types of mortgage rates available in the UK, with benefits and disadvantages.
