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Mortgage rates - how do they work?
There are two different types of mortgages available to buyers – fixed-rate, and standard variable rate. The ‘rate’ refers to the interest rate as charged by the lender, and this usually appears as a percentage – the lower the better! If you agree to a repayment mortgage, the interest rate will be covered within your monthly repayments, which will also contribute to paying off the total cost of the house itself. This is not the case for interest-only mortgages, which you can find out a little more about below.
The Mortgage Process
A fixed-rate mortgage basically offers exactly what the title suggests – the rate is fixed for the initial period of your mortgage (usually for the first 2-7 years).
The key benefit of a fixed-rate mortgage is that your rate is guaranteed not to change, so you can rest assured that your monthly payments and budget will remain the same even if there are some spikes in interest rates over the initial agreement period. The downside is that, if interest rates drop at any point, you would still be required to make repayments at that higher rate.
At the end of the initial agreement period, you’ll normally be switched to the standard variable rate (SVR). From here, you have several options – you can either continue with the variable rate, go for another fixed-rate agreement with your current lender, or remortgage with a different lender.
Standard variable rate mortgages (SVR)
Although the Bank of England base rate somewhat influences variable rates, lenders can usually set their SVR at any fee they see fit.
The bonus of an SVR mortgage is that your rate could drop at any time, leading to a decrease in your monthly payments.
However, it’s worth keeping in mind that your rate can also go up in accordance with the market at the time, so it’s always worth keeping an eye out for new deals.
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What are your repayment options? Well, with a repayment mortgage, your monthly payments cover both the interest on your mortgage and some of the loan itself, meaning you will eventually end up paying off the full cost of your home. With an interest-only mortgage, this is not the case.
Repayment mortgages are the most popular type with buyers.
With a repayment mortgage, you borrow the money required to purchase the property from a lender, and then make regular payments on a monthly basis (to cover the loan plus interest) until you’ve cleared the debt.
As long as you keep to the payment plan, you are guaranteed to have paid off the mortgage at the end of the term.
Interest-only mortgages cover only the interest part of the loan, meaning none of your monthly payments will contribute to the cost of the house itself.
As a result, with an interest-only agreement, your mortgage is never paid off.
The benefit is that your monthly payments will be much lower than with a repayment mortgage, but the downside is that you’ll still have to pay off the mortgage in full at the end of the term, unless you seek another mortgage agreement with the same (or another) lender.