by Mark Johnston
What does it all mean, fixed rates, variable rates, loan to value, Bank of England base rate. All complete new subjects to anyone new to the mortgage arena.
The Bank of England base rate is a rate that mortgage lenders, including banks and building societies may choose to use as their starting point for an applicable interest; they will then add their own interest on top and offer these to lenders.
Interest rates are possible the most complicated piece of the mortgage puzzle to grasp, there are two types; fixed rate and variable rate mortgages. Covering fixed rate mortgage detail in this article and variable rate mortgages in the next.
A fixed rate mortgage is a loan taken out which charges a set interest rate throughout the term of the loan. This is generally the type of loan that people think of when they take out a mortgage.
There are quite a few advantages to this type of mortgage rate. They allow the buyer to spread out the cost of the loan over a long period of time and the amounts are set and predictable. This protects the borrower from changes in the market and in interest rates. They also are simple loans in terms of complicated payment schemes and changing interest rates as well as the terms and condition applied and is a very popular option.
Generally with these loan types, the borrower can make additional payments to shorten the term of the loan and sometimes they also allow lump sumps to be credited to the loan without penalties. Terms can range from 2 years up to 50 years so the advantages of shortening the term are clear.
What are the disadvantages to fixed term loan? You need to ensure you can afford the monthly payments as these can be quite high. Also, fixed rate mortgages will restrict the amount of money you may qualify to borrow, thus limiting your price range on houses.
Irrespective of interest rate falls, your monthly payments will not change so while low interest rates will benefit variable rate mortgage holders, fixed rate mortgage holders will see no change.
The Bank of England Monetary Policy Committee (MPC) meet on a regular basis and change the BoE base rate on a regular basis, currently sitting at 0.5 per cent this is a good time to be in a variable mortgage.
It is widely commentated that the Band of England Base Rate is very likely to rise from the two year low of 0.5 per cent over the next twelve months. It is agreed that this rate is also highly unlikely to fall any lower. This makes the fixed rate mortgage an appealing prospect and while this may appear to be more expensive with such a low base rate.
The base rate will go up as well as down and if you have a stable monthly income and intend on owning your home for a long time, the fixed rate mortgage is probably worth looking into as a first time buyer.
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