Mortgage rates explained
There are various types of mortgage rate available in the UK and choosing the right one can you save money so it is essential to get the right advice. At Money Workout our professional advisers are able to answer any questions you may have about the different types of mortgage rate available to you. Below we have listed the most common types of mortgage rate available on the market today.
Standard Variable Rate Mortgage
With a Standard Variable Rate (SVR) mortgage, the interest depends on the interest rate of the lender at the time. This means if interest rates reduce your repayments may reduce, if the rate goes up, your payments may also. There are no SVR mortgages available on the market at the moment and this is a rate you will normally revert to once your introductory, discount or fixed rate period comes to an end.
Introductory Mortgage Rate
Most mortgage lenders offer customers an introductory period with a mortgage rate that offers either an improved rate or an alternative way of applying interest.
Fixed Mortgage Rate
As the name suggests this type of mortgage rate allows you to fix your rate and the payments so they don’t vary over a stated period or the life of the mortgage. This is particularly good if you want certainty and don’t like risk as no matter what the base rate your mortgage payments remain the same. Once the fixed mortgage rate period ends the mortgage will normally revert back to the standard variable mortgage rate.
Discount Mortgage Rate
This is where a mortgage lender offers to discount their normal standard variable mortgage rate. This is usually for a number of years and then once the offer period is up the mortgage rate reverts back to the standard variable rate.
Tracker Mortgage Rate
With this version of a variable mortgage rate loan the interest rate is set against a rate (either the bank of England base rate or other similar rate) and the mortgage interest rate is always a set percentage point amount more or less than that rate. As the rate changes the mortgage interest rate will “Track” it and adjust accordingly for the duration of the offer.
Capped Mortgage Rate
Here payments are variable and often linked to a base rate, but also have a ceiling level they can’t go above. This enables you to benefit from lower payments as the base rate falls, but also it caps any increases in payments to a set level, to offer you some protection should rates rise significantly. These are often introductory offers that apply for a period of time, after which the mortgage interest rate reverts back to a standard variable mortgage rate.
Collared Mortgage Rate
This is where a minimum mortgage interest rate is specified by the lender, meaning the lender has less risk in the mortgage and is able to therefore offer the mortgage at a lower rate
Droplock or ’Switch to fix’ Mortgage Rate
This allows a combination where a discount or tracker mortgage rate, gives you the option to change to a fixed mortgage rate at any point within the initial offer period, without paying any early repayment charges.
This may be useful when base rates are low giving you the option to switch easily to the protection of a fixed mortgage rate should interest rates look set to rise.
But be aware that you may have to pay an arrangement fee when changing to the fixed mortgage rate, despite having already paid one in your first deal. An increasing number of lenders now offer these loans, in some cases known as ’switch to fix’ mortgages.
