Mortgage Interest Rate

How to Get the Best Mortgage Interest Rate

Interest rates are probably the most important part about buying a house. After all, your aim is borrow the money you need for the least possible cost, so you need to assess which type of interest rate is best for your particular circumstances.

Fixed rates:

The rate of interest is fixed for a certain length of time, so you'll know exactly how much you'll need to find each month to pay the mortgage. The fixed rate is great for people who are a little stretched financially and need to know where they stand from pay cheque to pay cheque. They're also good value if interest rates look set to rise in the early years of a mortgage, although bear in mind that the mortgage providers are likely to be one step ahead of you and adjust their fixed rates accordingly. However, a fixed rate also means you could be lumbered with paying more than everyone else if general interest rates fall below the figure you've set yours at. But that's the risk you take in exchange for having certainty about how much you will pay each month.

Tracker rates:

A tracker mortgage is a variation on a standard variable rate. With a tracker mortgage the difference between the Bank of England base rate and your mortgage rate is fixed. Although standard variable rates closely follow the base rate, they are not formally linked to it. So if you want to ensure a cut in the base rate is always passed onto you in the form of a lower mortgage rate then a tracker could be for you. Of course, the flip side is that any rise in the base rate is also passed on straight away.

Standard variable rate:

This is the general rate of interest that lenders use and it's usually the most expensive option for the borrower. The standard variable rate is linked to the Bank of England's base rate and moves up and down in line with it, and a typical rate at the moment is about 1% to 2% higher than the base rate. So whenever you hear that the Bank of England has raised or cut interest rates by a quarter of a percentage point, you'll know your mortgage rate is probably about to go up or down by a similar amount.

If you're on this sort of standard rate, you'll probably notice that lenders like to introduce any increase with effect immediately and to delay any cuts by a month or two. it's never going to be the cheapest deal on the market so if you find yourself landed with it, be aware that you're effectively subsidising all the other borrowers who are taking advantage of any cut-price special offers! However, note that most special offer deals will revert to a standard variable rate once the offer period has expired.

Discounted rates:

This is simply a percentage discount off the lender's variable rate. So your monthly payments will move up and down in accordance with the lender's normal rate but you'll be paying at a reduced rate over the relevant time period. These are quite good for first-time buyers as a discounted mortgage can give you a couple of years of breathing space. A one or two per cent discount is especially good if there's no lock-in period afterwards because you can simply re-mortgage with another lender when the discount period comes to an end. Unfortunately, you'll often find you're locked in for another couple of years on the variable rate, so you won't be able to get out of this sort of deal unless you're prepared to pay huge redemption penalties.

Capped rates:

These ensure that there is a ceiling to the interest rate you will pay over a given period of time. If your lender's variable rate climbs higher than the capped rate you will benefit. But if it falls below the capped rate you'll just be paying what everyone else is paying.

Capped rates tie you in to the mortgage for a set period of time, similar to fixed rates. Capped rates give you part of the advantages of fixed rates and of variable rates. Again, you'll have to give something back for this. For example, the capped rate is likely to be higher than any fixed rate you can get. Like fixed rates, they make good sense for those on tight budgets who need to ensure that their monthly payments don't rise too far.

Which type of interest rate is suitable for you?

Suitability of different deals will depend on your personal circumstances and any tie-ins or penalties that may be attached. For more information on the pros and cons of different interest rate deals visit the Financial Services Authority (FSA) website.