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Mortgage rates in the UK

Mortgage rates in the UK can sometimes seem bewilderingly varied and complex. The interest rates you pay are determined by a number of factors some of which you have some degree of control and some of which you have no influence over. In this article we shall be looking at how mortgage rates are affected the type of mortgage that you have, and then have a look at the different types of mortgage interest deals which are available.

What is a mortgage? A mortgage is a loan which is secured by the property covered by the mortgage. A secured loan differs from other loans in that if you fail to make the due repayments for the loan on the due dates then the mortgage company can repossess the property and sell it off in order to secure full payment of the loan.

Mortgage loans are commonly repaid over many years, up to 25 years, and the mortgage interest rates are usually lower than conventional unsecured bank loans.

The first thing which affects mortgage rates is the type of mortgage which you want to take out. Is it a repayment mortgage or is it an interest only mortgage?

Repayment Mortgage
A repayment mortgage is the most common type of mortgage in the UK. If you have a mortgage for say 25 years then each month you will pay off part of the capital of the loaned amount and you will pay off some of the interest due on the loan. In the early part of the loan period the payments will be predominantly interest payments with a small amount of capital repayments and as the years of repayment continue the monthly payments will become increasingly capital based with interest payments being a declining proportion of the repayments.

The simplicity of the mortgage calculator is that at the end of the mortgage term the loan will have been fully paid off
The monthly amounts you pay to the mortgage company may vary depending on the type of interest rate you pay.

Interest Only Mortgages
This type of mortgage involves only paying the interest on the loan with none of the capital being paid off. This means that your monthly payments will be lower. However in order for you to avoid the risk of losing your home when the term of the mortgage is complete than you will have had to have invested in a fund which will be able to pay off the full capital amount of the loan.
From your point of view it is vital that you monitor the value of your investment to ensure that you are able to pay off the capital sum to the mortgage company when the mortgage comes to an end.

Another point to note is that because the monthly payments consist entirely of interest payments they will vary more than repayment mortgage payments if interest rates change.

So what types of mortgage rates are there?

Standard Variable Rate
This is where the interest you pay on the loan may vary during the course of the loan at the discretion of the mortgage company. Commonly the interest rates will rise and fall in line with changes in the Bank of England interest rate. Currently Bank of England Rates are at historically low levels, but there is no guarantee that rates will remain at this level, especially if inflation becomes a threat to the British economy.

The advantages of this type of mortgage rate structure are that they are flexible for the borrower, can be paid off, usually without financial penalty, if the borrower takes out a new mortgage loan with a different company at a better rate of interest. The disadvantage of these arrangements is that interest payments can become increasingly expensive if general interest rates rise. For example during a financial crisis in 1992 interest rates briefly rose to 15% which would be crippling for many households now.

Tracker Rate
A tracker rate is another variable rate where the mortgage rate is formally fixed at a set amount equal to or above or below the Bank of England interest rate or some other base rate. When the base rate changes so does the mortgage rate. Tracker rates are commonly for a fixed term after which the borrower reverts to a standard variable rate. They are fine for those who can afford increase in interest rates and take the benefit of falls interest rates. They are not so good if your finances would be severely strained by an increase in interest rates.

Discounted Interest Rate
A discounted interest rate is where your monthly payments can rise and fall but for an initial period you are given a discount on the standard variable rate. Borrowers are therefore given a temporary hand as these arrangements are usually for a fixed period after which the system reverts to a standard variable rate. As a borrower you have to be prepared for an increase in interest rate payments when the discounted rate expires and if interest rates rise generally during the period of the discounted rate your payments will increase.

Fixed Interest Rate
This is where the mortgage company and the borrower agree to a fixed level of payments for a period, say, the first two years of the loan. The advantage of such an arrangement is that the borrower knows precisely what the monthly payments are going to be for a fixed period. However if interest rates fall during fixed term period the borrower cannot benefit from this. If interest rates rise then you have to be prepared to pay higher monthly payments after the fixed term expires.

Capped Rate
This is similar to a fixed rate mortgage in that, for a fixed period mortgage rates cannot exceed a certain level (a cap) but if interest rates fall during the course of the capped rate you can benefit from these lower rates.

Early Repayment Charges
These are a looming feature of any analysis of mortgage rates. With certain types of mortgage rate arrangements if you pay off the full amount of the loan before its natural conclusion you may face a financial penalty which may amount to several thousand pounds. Normally with a standard variable rate mortgage you do not face such charges. They are very common with arrangements which have an initial special deal such as an initial fixed interest rate. When you move from a special deal to a standard variable rate mortgage these charges may be retained, so you need to check before you sign up to any special deal.

Get Professional Advice
With this variety in mortgage rates it is important to get professional advice from individuals or organisations, (like mortgage brokers) regulated by the Financial Services Authority. Trying to do it all on your own may prove an expensive mistake. Even then check the small print before you sign anything.

This document does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice.