Fixed rate mortgages are
available on a variety of terms and for most periods. At one end of the
scale there are some very short term deals fixed for say 6 months, and
at the other end of the scale there are offers that will fix the rate
for the entire term of the mortgage.
First let's look at the
disadvantages of taking a fixed rate. Clearly the most obvious
disadvantage is if interest rates fall - in this case you could find
yourself paying more than you would have had to with a variable or
discounted rate. If you have opted for a long term fixed rate then this
decision could cost you dearly over the period of the fixed rate. You
will also find that, with most fixed rates, you will be charged a
penalty (called a redemption penalty) if you wish to change your
mortgage or pay it off completely or in part in the first few years.
These redemption penalties are usually imposed at a level that would
make it uneconomic to change the mortgage or transfer to another lender
whilst the penalty is in place.
There many lenders who offer fixed
rates without redemption penalties or with penalties that only last
during the fixed rate period.
A capped rate will give you
the best of both worlds between a fixed rate and a variable rate. The
cap is basically a ceiling on the interest rate above which it will not
rise. On the other hand, if the normal variable rate falls below the
capped rate then the variable rate will be charged. So, you have a
guaranteed maximum rate with the benefit of a reduction in interest rate
if this happens - sounds too good to be true? Well there are some
catches - first you will usually find that the cap is set at a higher
rate than the best fixed rates for a similar period. Secondly, you also
need to watch out for redemption penalties as with fixed rates. The
third point to watch out for is that sometimes these products are sold
as 'cap and collar' products. This basically means that, as well as a
ceiling on the interest rate above which it cannot rise there is also a
collar on the rate which is a level below which the rate cannot fall.
Discounted rates are
usually linked to the normal variable mortgage rate but with a discount
for a set period of time. This means that the interest rate you are
paying will fluctuate up and down in line with base rates but you will
be guaranteed to receive the discount for a set period of time
Broadly speaking, you have the same catches to watch for as for fixed
rates. Look out for the early redemption penalties imposed on you by the
lender. In particular watch out for products that have redemption
penalties which extend beyond the period of the discount. you should
probably avoid discounted rates if you are on a very tight budget unless
you feel absolutely certain that interest rates will fall and remain low
for the foreseeable future. However, if you are budgeting with a
reasonable amount of leeway and you feel it is likely that rates will
fall then a discounted rate could be just the thing for you and may save
you a considerable amount of money over the early years of the mortgage.
A stepped rate may be
either fixed or discounted. The term 'stepped' simply means that the
rate will change in steps at certain fixed intervals. For example a
stepped fixed rate may offer a rate of 3% in year 1, 4% in year two and
6% in year three - in this example therefore you have a fixed rate for
three years which increases in these three stages. An alternative to
this may be stepped fixed rate where the interest rate decreases over
the term of the fix. For example the rate may be 7% in year one, 5% in
year 2 and 4% in year three. In this case the interest rate is again
fixed for three years but at the three different steps. The stepped rate
market is smaller than the conventional discounted or fixed rate market
and fewer products are launched in this format. However, it is one that
you should be aware of and one that will suit some people. Obviously
individual circumstances and requirements vary considerably and these
products will appeal to some people, particularly if they can see the
stepped rate fitting in with planned changes in income.
Standard Variable Rates -
The mortgage market has become
increasingly competitive over the last few years and you could be
forgiven for thinking that straight variable rate mortgages no longer
existed or were not worth considering. However, over the last couple of
years standard variable rate mortgage products have started to make a
come-back particularly with the direct lending operations. Rather than
simply being rate driven these products can be attractive for a number
of other reasons. In addition many of these direct lenders are able to
offer extremely competitive variable rates which will undercut the more
traditional lenders. If this is maintained over a period of years then
you could find yourself benefiting from a very competitive rate without
all the restrictions of an actual discounted rate. In addition to this
benefit you will also find that many of the lenders who offer these
products will also charge interest daily rather than annually which will
give a great interest saving on a repayment mortgage over the entire
period of the mortgage.
Cash back mortgages are ideal if you are happy to sit with a normal
variable rate but wish to raise some extra capital without increasing
the mortgage debt. Many of the deals available will offer a percentage
of the mortgage amount as a cash sum on the basis that the interest rate
charged by the lender will be the normal variable rate with no
discounts. All that the lenders are doing here is to give the offer of
cash up front as an alternative to a discounted rate. An alternative to
the very large cash back offers are products that offer a discounted or
fixed rate with a smaller cash back. This may be a few hundred pounds
and these cash back offers are really designed to cover the costs of
arranging the mortgage. In addition some lenders will refund costs such
as the arrangement fee and valuation fee once the mortgage completes.
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