Free advice line 0800 520 0923
Understanding mortgage jargon, or mortgage terminology will help you choose the right home loan. Interest rate terminology can be baffling but what follows is a simple explanation of each.
The interest rate on your mortgage fluctuates with the mortgage lenders standard rate. The lender’s interest level changes in line with the Bank of England’s base rate. While you may benefit from low interest rates, you may also suffer from an interest rate hike. More....
With a standard variable rate, it is difficult to accurately predict how much you will be paying per month. Visit www.bankofengland.co.uk for more information.
With this mortgage deal you will get a sum of cash as well as the loan. Usually you will be tied into the variable rate for a set period but the cashback facility allows you to make any necessary improvements to your new home, such as install double-glazing or buy that new sofa.
A discount mortgage rate enables you to pay a lower interest rate during the initial stages of your borrowing. This enables you to find your feet financially before moving to a higher rate, which is usually a standard variable rate. A discount mortgage rate is particularly popular with first time buyers.
Tracker interest rates are linked to the Bank of England rate or some other base rate. Which means the interest rate on your mortgage repayments can go up or down throughout the term of your loan. It differs from a standard variable rate because it’s independent of your lender’s base interest rate.
A tracker works if you can afford to pay more when interest rates go up, in exchange for benefiting when they go down. However, it’s not a good idea if your budget won’t stretch to higher monthly payments.
With a fixed rate mortgage, your payments are set at a certain level for an agreed period. At the end of that period, they’ll usually switch you to the standard variable rate. While you have the luxury of predicting your monthly payments (because they are not variable), you will be subject to charges for early payments.
Having a cap on a variable interest rate mortgage prevents your repayments from soaring too high should interest rates increase beyond your means. This system works for a set period, at the end of which you are usually charged the lender’s standard variable rate.
A collar simply means the opposite, whereby should mortgage interest rates fall; you will pay whatever minimum the collar is set at. Unfortunately, if interest rates fall below the collar you will not benefit.
Return to Debts homepage.
