Mortgage Rates

When you choose a mortgage lender, you then choose what kind of rate you would like.  Lenders normally can offer a choice from fixed rates, tracker rates and variable rates.  When you apply for a particular rate you may have to pay an arrangment fee for this rate which effectively ‘buys’ the rate for that period.  Arrangement fees vary and can be as much as 2.5% of the loan amount.  When selecting your mortgage don’t be tempted by rate alone.  The true cost of the mortgage will take into account not only the rate offered but also the cost of arrangement fees and valuation fees too.

Fixed Rate Mortgage

A fixed rate mortgage is one where you choose one of the lender’s available fixed rates.  These normally range from 2 years upwards.  The benefits of a fixed rate are that you are able to establish a mortgage budget  for your ideal term without having to be concerned with economic interest rate fluctuations.  Fixed rate mortgages can be very beneficial for first-time buyers  on a budget.  It’s good to know exactly what your outgoings are each month which makes budgeting for the rest of the month easier.

Lately fixed rates have been dropping as a direct result of the Bank of England rate dropping.  It is now even possible to find a better fixed rate than the one you might currently have, pay the redemption penalties and move to a new lender, and save money over the same term too.

One of the disadvantages to a fixed rate mortgage are when interest rates go down.  Where those people on tracker and variable rate mortgages might see their monthly payments lowered, a fixed rate mortgage remains the same so you won’t benefit from lowered interest rates.  At the same time, if interest rates go up you are not effected either.

Fixed rates normally have a redemption penalty for the length of the fixed rate period.  It is normal to have to pay an arrangement fee when securing a fixed rate mortgage.

Tracker Rate Mortgage

A Tracker rate mortgage is where the lender offers you a rate that tracks the Bank of England base rate at a set percentage.  The Bank of England base rate moves up and down in line with economic conditions and as such your mortgage payments can go up as well as down too.  Tracker rate mortgages tend to be for those who want to benefit from interest rate reductions but can afford to budget for higher mortgage payments if necessary.

Tracker rates tend to have redemption penalties for the time that you track the Bank of England.  It is also common to pay an arrangement fee when applying for your tracker rate.


Variable Rate Mortgages

A variable rate is the lender’s own rate which tends to be Bank of England base rate plus whatever the lender decides.  Up until a while ago variable rates tended to follow the Bank of England rate movements but as the Bank of Enlgand has dropped so much, many lenders have chosen not to pass on those cuts to their variable rates. 

Under normal circumstances variable rates tend to have no redemption penalties but you should always check with your lender to make sure this is the case.