Fixed rate – A rate which keeps your monthly payment the same for a given period, typically 2,3 or 5 years but longer fixed rate periods are available. These are suitable for people who want to know what they are paying every month. If interest rates increase then your monthly payment stays the same which is a bonus, however, if interest rates go down then your payment will also stay the same therefore you will not benefit.
Tracker rate – this is a rate which goes up and down with (tracks) the Bank of England Base rate. Every month on the news you will hear the newsreader say “the Bank of England decided to keep interest rate the same today” this is what you need to keep an eye out for because if you are on a tracker rate then this could affect your monthly payment. If the BoE rate goes up then so does your monthly payment, but if the BoE base rate goes down then your monthly payment will also go down
LIBOR rate tracker – LIBOR stands for (London Inter-Banking Offer Rate) the rate at which banks charge each other to borrow money. This rate is reviewed every 3 months and can go up and down like the tracker or variable rate. These rates are normally associated with mortgage lenders in the “sub-prime” marketplace. These mortgage lenders normally charge higher rates and are designed to assist people who have had credit problems in the past. The rates are higher because of the higher risk in lending to someone who has a history of missing payments to their creditors
Variable rate – a rate which is set by the mortgage lender who is lending you the money. This rate can change anytime the lender decides. I.e. the BoE base rate can stay the same, but the lender may just decide to increase or lower the rate whenever they want and vice versa. The BoE base rate can increase but the lender may decide to keep or lower their variable rate at any time. The variable rate is also the rate you normally revert to after your initial irate finishes. The variable rate is higher than your initial rate in most cases so just before your initial rate finishes make sure you contact an adviser or your mortgage lender to negotiate a new deal before it increases to the lenders variable rate
Discounted rate – this is a discount from the variable rate as described above. You normally qualify for a discount from the lenders variable rate for an initial couple of years. It will then revert to the lenders variable rate after the discount period ends
Offset mortgages – Also known as an Australian mortgage – this is a brilliant concept. An Offset mortgage is a mortgage which is tied to a bank account and a savings account. So, if you have a £100,000 mortgage and £10,000 worth of savings then you only pay interest on £90,000 worth of mortgage because your savings have been “Offset” against your balance of your mortgage. As interest on mortgages are mostly charged daily if you pay your salary through your linked bank account along with your savings you have one of 2 options in this instance to either reduce the term of your mortgage and keep the payment the same or reduce the payment and keep the term the same. Either way, depending on how much you pay through the accounts and dependent on savings, you could potentially save a great deal of money. You would not earn any interest on your savings, but you save interest on the money you owe on your mortgage, therefore if your mortgage is at a rate of 2% then you will be saving 2% per annum on that money and savings accounts these days are below 1% normally.
After your initial rate finishes your mortgage will normally revert to a variable rate. The variable rate is higher than your initial rate in most cases so just before your initial rate finishes make sure you contact an adviser or your mortgage lender to negotiate a new deal before it increases to the lenders variable rate.
Good advisers will contact their clients around 3 to 4 months before their rate is due for renewal to get their new mortgage deal in place in time. After all you do not want to be paying the higher variable rate when your initial deal ends. Do not leave it until the last minute it can take around 6 – 8 weeks to get all the necessary paperwork sorted to re-mortgage to a new lender with a better deal, so, please do not start a couple of weeks before hand otherwise it will not go through in time