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Mortgage Interest Rates - part 1
Now that you understand the various ways that a mortgage can be repaid, you need to look at the way the interest is charged on your mortgage.
Your aim is to pay as little interest as you can on your mortgage, so interest rates are the most important part about buying a house. You need to decide which type of interest charging you want your mortgage to be so that it best suits your circumstances.
Standard variable rate
A standard variable rate (SVR) mortgage is linked to the Bank of England\'s base rate. Therefore, it moves up and down in line with it. This means that when the Bank of England raises or cuts interest rates by a percentage point, typically your mortgage rate will go up or down by a similar amount.
SVR mortgages mean that the amount you repay on your mortgage can vary, so while it may be affordable for you now, if the Bank of England rate increases steadily, so will your mortgage. It means that you have to be prepared to pay more for your mortgage. This is not good if you are on a tight budget.
Of course, it may go the other way and rates decrease, meaning your mortgage should follow suit!
However, as there is no formal link between the base rate and a SVR mortgage, you cannot be certain that if the rate drops, so will the amount you pay!
Fixed rates
A fixed rate mortgage is where the rate of interest you have to pay is fixed for a set period of time. This gives you certainty as to how much your mortgage repayments will be every month – which is particularly useful if you are on a tight budget.
However, the downside is that if the Bank of England base rate drops, your mortgage amount will stay the same.
Homeowners who have fixed rate mortgage have the rate fixed for a set period – normally between 1 -5 years. At the end of the period, their mortgage will revert to a SVR type.
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