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Rate Types

One of the newer facilities offered with mortgages is the flexibility to vary the amount of your repayments, higher or lower and to take a repayment holiday if you have overpaid for a regular period. It is ideal for people whose income may fluctuate during the course of a year.

Do you believe interest rates will go down over the next few years or stay very stable? A discounted mortgage allows for a percentage discount from the lenders' standard variable rate (SVR) for a specific period v say two or three years. This can work in your favour if interest rates fall or stay stable but not as attractive if rates should rise sharply. Always compare the difference available for a discounted against the equivalent term for a fixed rate. Also consider the possible redemption penalties that mat be attached to this type of mortgage.

The variable rate mortgage was, until the 1980's, virtually the only type of mortgage available. With a variable rate mortgage the interest rate rises and falls (varies) according to the UK Base Rate. The Base Rate is set by The Bank of England and lenders are free to decide for themselves the amount they will alter their own interest rates in response to a movement in the Base Rate.

If you prefer to know exactly what your outgoings will be, then perhaps a fixed rate mortgage will give you that peace of mind.

With this type of mortgage the rate of interest that you pay is fixed in advance for a certain period, normally for between one and five years, although, it can be fixed for the whole term! After this period, the mortgage reverts to a variable rate. There will probably be redemption penalties during the fixed rate period and sometimes for a period during the variable rate period, after the end of the fixed rate.

You can hedge your bets by opting for a capped rate mortgage. There will be an upper limit, the cap' above which your mortgage rate will never go, for the period of the cap. However, if the rates should fall below your capped rate then you will benefit, as your rate will reduce also. Some of these types of mortgage also have a minimum lower limit or a collar'. At the end of the capped period the mortgage will revert to the variable rate.

Could you do with a lump sum of cash at the start of your mortgage? With a cashback mortgage the lender will give you a lump sum of cash at the start of your mortgage. In return, you typically have to agree to take the lenders' standard variable rate for a period of time (normally five years) during which time there are normally quite stiff penalties if you redeem early or try to leave the mortgage.

With this type of mortgage rate you are tied to the Bank of England Base Rate(BoEBR) rather than the individual lenders' own standard variable rate. This is usually a percentage above the BoEBR and will track at this level. It will fall and rise accordingly.

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Nicholas Hall is an adviser with Julian Harris Mortgages Limited who are authorised and regulated by the Financial Conduct Authority. Your home may be repossessed if you do not keep up payments on a mortgage or loan secured on it. Written quotations available on request. All loans are subject to status. Some loans may require assignment of life assurance. Residential Mortgage transactions will not incur a broker's commission fee. THE STERLING EQUIVALENT OF YOUR MORTGAGE UNDER A FOREIGN CURRENCY MORTGAGE MAY BE INCREASED BY EXCHANGE RATE MOVEMENTS. Think carefully before securing other debts against your home.

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