Types of Interest
Variable Rate
This is the rate that changes. It is not directly linked to the bank of England base rate as it can change whenever the lender desire. The variable rate will change from lender to lender. You often will find yourself on the variable rate after taking an initial ‘product deal’.
Lenders used to make significant profit from clients sitting on the variable rate, but with clients becoming more and more savvy, this doesn’t happen as much people are happy to re-mortgage. As a result, most lenders offer their existing customers ‘new deals’ when they are approaching the time on the variable rate. These product transfer deals are not normally market leading but they help the lender retain clients.
Fixed Rate
Everything has a cost and the same is true for fixed rates. The cost of a 5 year fixed rate is greater than a 2 year fixed rate. It boils down to whether you are prepared to pay the extra monthly cost for the peace of mind of having your mortgage fixed for longer.
A booking fee is normally paid to get the best rates, here we need to look at the saving against the cost to book the rate.
By fixing your mortgage you know exactly how much you will pay for the time you fix it for. This works very well in times of expected interest rates rise, but not so good if interest rates are likely to fall.
Discounted Rate
This is a discount off the lenders variable rate which as discussed can change at any time
Tracker Rate
This loan is more secure than a discount rate as it tracks the base rate at an agreed figure from the start. With the Bank of England base rate set low, the trackers are currently sitting at a set amount above the base rate. Trackers are great in times of interest rates falling but not good if rates go up.
Cash Back
Some mortgage deals have cash back to incentivize clients. However, nothing is given for free and the rate you get will almost certainly be worse than if you did not take the cash back. Advice should be taken before this option chosen.
