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Deciding between whether a capped, fixed rate variable, tracker or discounted rate mortgage is more suited to your needs requires careful consideration as well as a good understanding of home loan options available in the market today. The following article provides a break down of individual rate options along with the pros and cons based on ones attitude to risk. As you probably already know, not all mortgage rate options are suitable for everyone. Knowing what distinguishes mortgage rates from one another goes a long way in assisting you to identify the right type for your needs. When trying to determine what type of home loan or mortgage loan best suits your needs, paying attention to your attitude towards risks helps make coming to a decision much simpler. People who generally approach risk with a cautious attitude typically find fixed rate home loans more suitable for them while people who are more open to risk and adventure tend to opt for tracker mortgage rate options which have a tendency of rising and falling in accordance to bank rates. The following are just a few descriptions on common mortgage rate options along with their advantages and disadvantages: Fixed Rate Mortgages: Fixed rate mortgages allow a home owner to lock in a fixed repayment cost for a specified time period that does not fluctuate in accordance to lender’s standard variable rate or the central bank’s base rate. Popular fixed rate home loans are those that offer two, three and five year fixed rates, however, fixed rate mortgages between ten and thirty years at reasonable rates are more common among lending institutions. The longer the fixed rate loan period, the higher the home loan interest rate. Similarly, borrowers are charged lower fixed rates when loan to values fall below 75% - mortgages that are arranged for 90 to 85% of the property value generally incur a higher interest rate. The advantages of having a fixed rate mortgage is that they allow one to have peace of mind knowing that the mortgage payments will not increase with the rise in the base rate. Fixed rate mortgages make it much easier to budget for the selected fixed rate period and are a great home loan option for first time buyers or home owners stretching themselves to pay the maximum affordable payment. The disadvantage of this option on the other hand is that monthly repayment stays the same even when bank base rates experience a reduction. Discounted Rate Mortgages: Discounted rate mortgages offer borrower’s a certain percentage off of the SVR or standard variable rate. This can in other words be described as a reduction in normal variable interest rate say by 1.3% for 1 or 2 years. Most people assume that the higher the level or percentage of discount offered, the better the home loan deal. This is an untrue and common mistake made by those thinking of signing up for a discount rate home loan. What most people fail to understand is that the lenders standard variable rate dictates the actual pay rate period after the discount is applied. As is the case with fixed rate home loans, the longer the discount rate period, the smaller the discount rate given and the higher the repayment rate. The advantage of opting for discounted rate mortgages is that when lenders reduce their SVR; borrowers’ rate and consequently monthly payments also reduce. The disadvantages are that when the bank base rate increases, your mortgage rates are also affected impacting your monthly payments. Tracker Rate Mortgages: Tracker rate mortgages, as mentioned earlier are for adventurous risk takers since interests are based on base bank rates which are known to fluctuate. For tracker rate mortgages, interest rates are expressed as a percentage above or below the central bank base rate (i.e. +1.5% over central bank base rate for 3 years) Advantages of tracker rate mortgages are that they are guaranteed to follow the central bank base rate for the stipulated period the tracker rate is set at. The disadvantages are that monthly mortgage rates increase with an increase in bank base rates. Different types of home loan mortgage rates. How to choose the right home loan package
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