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Rates
There are a vast range of interest rates options to choose from
along with your mortgage.
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Variable Rate is where the interest that you pay depends
on the general economy. Interest rates are constantly rising and
falling, and therefore makes it difficult to predict what your
payments will be. In many other countries this option is considered
far too risky, due to the uncertainty of the interest rates.
Fixed Rate is when there is a set interest rate for a fixed period of time, and then at the end of the term the normal variable rate is paid. An arrangement fee is usually payable when taking out this type of mortgage.
With a fixed rate there may be early redemption penalties that in some cases may even extend beyond the fixed rate term. For example the fixed rate may be for a period of three years but the penalty period may extend to five years, during which you must pay the variable rate that the lender charges.
This practice is considered to be highly unfair, and now many providers offer fixed-rate mortgages where there is no penalty for paying off or changing the mortgage once the fixed rate period ceases.
A fixed rate may be chosen if you expect interest rates to rise generally, and enable you to plan your budgeting.
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Discounted Rates are very convenient if money is tight
at the beginning of the mortgage, but is likely to improve in
the near future. It has a lower rate of interest in the earlier
years and is predominantly intended for first time buyers, who
initially have a low income.
However caution should be taken when dealing with discounted
rates, as with some deals the discount is not genuine and the
interest saved in the earlier years is just added to the outstanding
loan. These deals can cause a lot of problems when the outstanding
loan becomes larger than the value of the home, or when you decide
to move.
There are early redemption penalties with the discounted-rate
mortgage, and this penalty period extends further than the discount
period, which therefore locks you into the lender's standard variable
rate.
Capped Rates varies in line with general interest
rates, but does not rise above the interest rate cap, or fall
below a certain rate. This is called an interest rate collar.
This agreement lasts for a fixed period of time, after which the
normal variable rate is paid.
Capped rates, like fixed rates enable you to plan your budget
accordingly. An arrangement fee must be paid for a capped mortgage
and severe early redemption penalty during the first few years.
Cash back deals. Some standard variable rate mortgages
offer a cash sum when the mortgage is taken out, which can be
used in any way. This is not an interest rate option, but this
sum can be invested and can be profitable.
With cash back deals there is an early redemption penalty period
of five years, in which should you pay part or the entire mortgage,
you must also pay the cash back received. It may be beneficial
to combine different interest rate options and some lenders allow
you to do this.
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