Mortgage Rates UK: Overview

Having decided which type of mortgage is most appropriate for your financial circumstances, the next step is to address the sticky issue of mortgage interest rates. Today's marketplace is awash with so many different mortgage packages that it can be difficult knowing where to begin. To help make sense of what's available we've outlined the pros and cons of the most popular options:

Fixed Rate Mortgage : With the Bank of England's base interest rate at a near historic low, fixed mortgages are an extremely attractive option. Choosing a fixed rate mortgage means that monthly repayments remain the same over the lifespan of the loan (which makes budgeting easier) and that the loan will be cleared once the term is over. This combination of factors makes fixed rate mortgages the 'safest' form of loan and hence their appeal to the more prudent investor. With some fixed rate mortgages the 'fixed' bit expires after an agreed period of time (typically five years), whereupon repayments are made at the Standard Variable Rate.

Standard Variable Rate Mortgage : Interest rates are tied to the Bank of England's base rate, which means that your monthly repayments are to some extent dependent on the performance of the economy.

Capped Rate Mortgage : A maximum fixed interest level means that repayments won't get out of hand if the economy takes a downturn (bear in mind that some also have a lower 'cap', beneath which repayment rates can't dip) Otherwise capped loans behave much like a SVR mortgage.

Discounted Rate Mortgage : The loan provider offers the borrower reduced rates for a specified period of time (typically 2-3 years). When the discounted period is over; repayments are normally switched to the standard variable rate. If you are considering a discounted rate mortgage make sure that you read the small print carefully. It's not unheard of for borrowers to find themselves tied to unfavourable loans by 'lock-in' clauses, such as expensive early redemption penalties.

Cashback Mortgages : Some financial providers offer a capital lump sum in exchange for taking out a mortgage with them (often in the hope of wooing first time buyers). Usually the 'cashback' comes with strings attached in the guise of steep financial penalties if the borrower wants to change mortgages before a fixed period of time.

Flexible Mortgages : Flexible mortgages are popular with self-employed homeowners (or anyone who's income fluctuates) as they allow extra payments to be made and 'payment holidays' to be taken. Flexible mortgages are also referred to as 'Australian mortgages'.

© AskFinancially.com 2008

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