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interest rate schemes
There are various types of mortgage interest rate schemes;
The principal schemes are listed here. However, not all may be available at any one time; we can advise what is available.
VARIABLE RATE MORTGAGE
This is the normal method of charging for a loan from a mortgage lender.
The interest rate charged generally rises or falls in line with other interest rates in the economy. As rates change customers repayments will therefore rise, or fall, after notice from the lender.
DISCOUNTED RATE MORTGAGE
This scheme gives the customer a guarantee that for a certain period of time, as agreed at the commencement of the loan, the rate charged will be reduced by a specified percentage.
If the standard rate changes the discounted rate will also change, whether this is up or down.
This type of scheme may attract an initial fee to the lender to set up the scheme.
In addition, depending on the type of discount arranged, there may be redemption penalties on the loan if it is redeemed within a certain period of time.
When the discounted rate expires the interest rate will revert to the lenders variable rate.
FIXED RATE MORTGAGE
This scheme gives the customer a guarantee that for a given period of time the applied mortgage interest rate will be fixed and will be unaffected by either rises or falls in underlying interest rates.
A benefit of this scheme is that customers will be certain of the amounts of their repayments for the period of time that the fixed rate is in force. There can be no variation of this.
This type of scheme may attract an initial fee to the lender to set up the scheme.
In addition, depending on the type of fixed rate arranged, there may be redemption penalties on the loan if it is redeemed within a certain period of time.
When the fixed rate expires the interest rate will revert to the lenders variable rate.
TRACKER RATE MORTGAGE
This is a specific type of variable rate product.
The interest rate charged tracks a base rate and this means that the interest rate is variable also.
When the loan is set up customers are advised of the appropriate ‘margin’ to be applied to the loan. With this scheme you are guaranteed that a change in base rate will be reflected in the mortgage rate payable.
This type of scheme may attract an initial fee to the lender to set up the scheme.
In addition there may be redemption penalties on the loan if it is redeemed within a certain period of time.
CAPPED RATE MORTGAGE
This scheme gives customers a guarantee that for a given period of time the applied mortgage interest rate will not rise above a pre-determined level even if other interest rates increase.
If underlying interest rates vary downward then the rate applied will also fall. If however underlying interest rates rise then the new rate will not exceed the ‘cap’.
This type of scheme may attract an initial fee to the lender to set up the scheme.
In addition there may be redemption penalties on the loan if it is redeemed within a certain period of time.
When the capped rate expires the interest rate will revert to the lenders variable rate.
FLEXIBLE MORTGAGE
This mortgage scheme allows more flexibility over the payments to the lender and also to place additional sums in the mortgage account and also to withdraw them.
It is very important with this type of mortgage that adequate control is maintained over the loan and that the loan is used as a method of reducing borrowings quicker than a conventional mortgage. Due to the flexibility of the product it would be possible to borrow monies and increase the level of debt, when the intention was to reduce the overall level of borrowings. Caution and good financial management is therefore needed with this type of product.
The benefits available vary from lender to lender but in general flexible mortgages provide a far greater degree of flexibility than some of the other schemes available.
It is also possible to arrange a flexible mortgage with the initial benefit of a discounted rate for a limited period of time.
CASHBACK MORTGAGE
A cashback mortgage may be arranged using a variety of the previously mentioned schemes.
The lender pays a cash sum to the borrower once the loan is drawn down. The cash back is usually a stated sum or a percentage of the capital borrowed.
The amount of the cash back available will be in comparison to the level of interest charged by the lender. The higher the rate of charge then generally the higher the amount of the cash back.
Early redemption fees or penalties usually apply if the scheme is ceased within the set period.
CAT STANDARD MORTGAGE
This type of mortgage has to meet certain Government standards for Charges, Access and Terms. It is a simple, clear mortgage with straightforward terms.
The interest rate is based on the lenders variable rate and is guaranteed not to exceed the Bank of England Base Rate by a certain percentage depending on the loan to value you have.
It is important to remember that just because this type of mortgage meets with CAT standards, this does not guarantee that it will be the most suitable for your needs. We can provide more information on how CAT standard mortgages work.
If you arrange a mortgage with a beneficial payment level (Fixed/Discount/Capped) you will be provided with a comparative figure of the true cost of the mortgage had it been arranged at standard rates. The purpose of this is to show you the effect of the rate benefit and also to advise you of the relative amount you may be paying when the special arrangement ceases.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
PLEASE BE AWARE THAT SOME MORTGAGES ARE NOT REGULATED BY THE FSA -
INCLUDES BUY-TO-LETS, COMMERCIAL, OVERSEAS AND SECOND CHARGES