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  4. Mortgages - Types of Mortgage Interest

Mortgages - Types of Mortgage Interest

Interest that is paid on mortgages comes in two forms :

  1. Fixed
  2. Variable

Fixed Rates of Interest

Just as there are many forms of mortgages, so are there many different ways to pay them off. Fixed rate mortgages protect you from the uncertainty of fluctuating interest rate, enabling you to budget more accurately.

A fixed rate mortgage may work for or against you. Imagine you take out a 5 year fixed mortgage at 7%. If the standard rate of interest falls to 5%, you will have lost out. However, if interest rates shoot up to 13%, you would have make an excellent decision.

Here is an example of a typical fixed rate mortgage:

Three fixed rate schemes are offered for either 2, 3 or 10 years:
  • 5.49% fixed for 2 years (APR 7.2%) - Special for First Time Buyers.
  • 6.99% fixed for 2 years (APR 7.5%)
  • 7.99% fixed for 5 years (APR 7.9%)
  • 8.99% fixed for 10 years (APR 9.0%)

As you can see, the longer the term, the higher the rate of interest. The mortgage lender therefore covers themselves as much as possible.

Variable Interest Rates

Variable rates are currently around 7.0% and are expected to stay near that level for the rest of the year. Variable rates may be discounted for a fixed period. This means that for a fixed period, you will pay interest on your mortgage at a lower level than the standard variable rate.

Example:
Assume the Standard Variable rate is 7.00% and the Discount rate is 2.50%. To work out the Discounted Variable rate (i.e. the rate you will pay), simply subtract the Discount rate from the Variable rate, in this case 7.00 minus 2.50, giving a discounted rate of 4.50%

Lenders will give discounted rates to First Time Buyers. They may also give you this preferred rate if you transfer you mortgage to them, or for existing customers who are moving home again. The rate may also vary depending on the size of your mortgage (the higher the mortgage, the higher the discount rate).

It is very important to remember that the discounted rate only lasts for a fixed period (often 12 months). After that period, the lender's Standard Variable rate will apply. Always check to see how long the discount rate . "

(www.houseweb.co.uk/house/buy/mortgage/)