Variable Interest Rates Explained for Mortgage Buyers

by Mark Johnston

The complexity around the interest rates used, terms, the Bank of England base rate and how this applies to your mortgage is not as complex as it may first appear.

Most mortgage lenders, building societies and banks will base the interest rate that they charge you on the Bank of England base rate, with an additional few per cent on top. This is why the BoE Base Rate is the first point to understand

The Bank of England Monetary Policy Committee (MPC) meets every month and decides whether the Base Rate should be changed, this is currently at 0.5 per cent – the lowest it’s been in quite a few years.

Lenders would then take the Base Rate and add their own charge on top, for example; the base rate is 0.5% at the moment so a lender may add an additional 2.5% on top to make a total of 3% interest that would be applied to your loan.

Variable rate loans are generally a recommended option where it is anticipated that interest rates will continue to decline but in the current economic conditions, with a very low interest rate at the moment, it’s generally accepted that the Bank of England Monetary Policy Committee will raise the base rate within the next 12 months. But low interest rates will entice first time buyers into the market with the benefit of initially lower monthly repayments.

Another advantage of the variable mortgage is that qualification entry criteria are somewhat lower than with the fixed rate mortgage offers. Often monthly payments are affordable and allow the borrower to buy a more expensive home. Low interest rates allow the borrower to use that extra money for other parts of their household budget, certainly a factor worth considering when VAT has just gone up to 20 per cent.

Also, there are often introductory interest rates, which attract the borrower away from fixed rate repayments in favour of these temporary introductory lowered interest rates. Remember, your loan will need to be paid back in full and breaks and lower interest rates at the start may end up causing the length of the loan repayments to extend and may cost you more money in the long run.

Another disadvantage is the complex nature of the terms and condition of the loan which are often accompanied by penalties and charges for any additional repayments or bulk funding.

ING Direct has a promotional tracker at 2.19 per cent at the moment but this requires a 60 per cent loan to value and is only applicable for 24 months. More sustainable is their offer of a 2.35 per cent tracker where there is a 60 per cent LTV.

Obviously these rates are subject to continual change not only from the lenders perspective but at the mercy of the BoE Monetary Policy Committee.

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