E Loan

What is the Best Mortgage Rate?

From the five kinds of mortgage rate: fixed, discount, variable, tracker and capped, which one is the best? Below article will describe the different types of that mortgage rate options including the advantages and disadvantages for each option.

First, fixed rate mortgages. You can lock into a fixed repayment cost that will not fluctuate up or down with movements in the lenders base rate. The most popular fixed rate mortgages are 2, 3 and 5 year fixed rates. The longer the fixed rate period the higher the interest rate.

The advantages of fixed rate mortgages is that you will not be worry that your mortgage payment will rise with increases in the base rate. The disadvantages is the monthly repayment will remain the same even when the economic environment sees the lenders reducing their base rates.

Second is discount rate mortgages. This kind of mortgage offers a percentage off of the lenders Standard Variable Rate (SVR). This takes the form of a reduction in the normal variable interest rate by say, 1.5% for a year or two. Assuming that the higher the level of discount offered the better the deal is a common mistake of those considering a discount rate. The longer the discount rate period the smaller the discount offered, and the higher the rate. Shorter periods such as 2 years will attract the highest levels of discount.

The advantage of discount rate mortgage is if the lender reduce their standard variable rate, your interest rate and monthly payment will also reduce. The disadvantage is when the lender increases their base rate, your mortgage payment will also increase. Affordability of the mortgage at the end of the discount rate period should be considered at outset. There are no guarantees that follow on rates will be available, and so you should be certain that you are able to afford the monthly payment at the lenders standard variable applicable upon expiry of the discount rate period.

Third is tracker rate mortgages. This mortgages guarantee to follow the lender’s base rate when it moves up or down. The most popular tracker rate mortgages have been 2 and 3 year products.

The advantage of a tracker rate mortgages is that it guarantees to follow the lender base rate for however long the tracker rate is set up for. The overall cost calculation of a Lifetime tracker rate can be significantly lower than taking shorter term mortgage products with the ongoing costs of remortgaging. The disadvantage of tracker rate is mortgage payment will go up if the lender increases the base rate.

Next is variable rate mortgages. These home mortgage rates are more commonly known as the lenders Standard Variable Rate (SVR), and are the rate that you come onto after the expiry of a fixed, discounted, tracker or capped rate mortgage.

The advantage of being on the lenders Standard Variable Rate (SVR) is that there will be no early repayment charge for redeeming the loan in full. Not all lenders have chosen to pass on through their standard variable rates, reductions made by the lenders. While the disadvantages is generally the SVR will be a higher rate of interest and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product.

Last, capped rate mortgages. This kind of mortgages is a variable rate mortgage which has a fixed limit to how far the interest rate can increase (the cap), and provides the option to know the maximum level of mortgage payment from outset.

The advantages is if the lenders base rate falls resulting in a fall in the lenders standard variable rate below the level of the capped rate, then your monthly repayment will reduce. While the disadvantages, because a capped rate offers the best of both worlds to the borrower, the capped rate is usually uncompetitive as lenders need to price in the risk of rate reductions, leaving those such as first time buyers or those stretching their affordability, exposed to a higher rate than would be available with a fixed rate.

Find more tips on home equity rates.