Mortgage interest rates are important to understand as they determine how much your monthly repayments will be when buying a house.
If you are a first-time buyer or have a mortgage and haven’t checked your rates recently, here’s what you need to know.
What are mortgage interest rates?
Like most loans, you repay in instalments the amount you’ve borrowed as well as interest. This is the case with repayment mortgages, which is the type most people choose these days. As well as paying a set amount of your balance, you pay interest on top of that.
If you have an interest-only mortgage you will be paying just the interest and none of the capital. None of the monthly payments you make pay off the loan as you pay it in one lump sum at the end of the mortgage term. Your monthly payments are lower but your debt is not reduced. People with a lot of equity may choose this type of mortgage.
What interest rates will I pay?
Mortgage lenders tend to have a wide range of deals available with different rates, so you will need to see which deal is best. It also depends if your mortgage interest rates are fixed or variable.
Fixed-rate mortgages
As the name suggests, the interest rate of such mortgages is fixed for an agreed period. This can be anything from two years to 10. According to the government’s Money Advice Service, the average rate in December 2020 was 2.49%.
Choosing a fixed-rate mortgage means your monthly payments remain the same throughout the fixed term. As a result, it helps make budgeting easier.
Variable-rate mortgages
If your mortgage has a variable rate, interest payments might go up or down from month to month. This means what you pay monthly is subject to change.
There are different types of variable-rate mortgages. One of those is the tracker mortgage, which follows the Bank of England base rate. What you pay is usually the base rate plus a certain percentage. For example, if it is 2% + base rate, the interest you will pay is 2.1%. If the base rate changes, so will your interest rates.
Tracker mortgages may run for anything from two years to the entire term of your mortgage.
Discount mortgages follow the lender’s standard variable rate, or SVR. The lender sets the rate and the discount is whatever was agreed at the start of your mortgage. For example, if the mortgage lender’s SVR is 6.3% and your discount is 4%, you would pay 2.3%.
Your interest rate usually reverts to your lender’s SVR when an initial fixed period comes to an end. SVRs tend to be quite high, so it can make sense to switch or remortgage before you are moved to the SVR. Before doing that, remember that may have to pay an early repayment charge to your existing lender if you remortgage early.
Which mortgage should I choose?
At The Mortgage Dog, we advise chatting to a mortgage adviser before making your decision as individual cases differ.
If you want the security of paying a set monthly amount so you can budget, a fixed-rate mortgage might be best. Variable rates tend to attract lower interest rates, but no-one can predict what the Bank of England rates will be in the future. If you don’t mind the uncertainty, you may prefer a mortgage with a variable interest rate.
For more details, contact us today.
Remember, your home may be repossessed if you do not keep up repayments on your mortgage.
‘Representative Example 3.85% APRC, based on borrowing £130,000 over 18 years on a 2.98% fixed rate until 30th June 2018, giving 26 monthly payment of £778.36, followed by 190 payments of £837.79 on a variable rate (currently 4%). Total amount payable £179,812.96, including the following one off costs – £30 remittance fee and £248 valuation fee’
