With interest rates dropping to a historic low, now is a good opportunity to be searching for a new mortgage product in the hope of saving some monthly financial budget, and hopefully a lot of money in the future. But if you are beginning to compare all mortgage rates, what precisely are all of these different types of mortgages available from banks?
First, for about a third of home owners, the fixed rate mortgage is the most used type of mortgage. With this type of mortgage you agree with your chosen bank that for a certain amount of time you will pay a fixed rate of interest. The fixed term period may be a few months up to several years, it depends on the offers available on the market. How low the interest rate is will vary by on how long you are fixing it for. The briefer the time period, the more reduced the chance there is to the bank that the rates could go back up in that time period, so usually the interest rate offered is usually lower. It is this fixed element of the mortgage that many home owners do want. For the agreed period you know exactly how much you will be paying out for your mortgage. There can be no interest rate increase surprises to upset your budget. You are sure that unless you move your mortgage, exactly what you will be paying.
But this is not solely an advantage, it is also seen as a disadvantage. If base rates do drop more, as has been in the news a lot currently, then the amount that you are paying doesn’t fall. And this is the gamble of this sort of mortgage. You know exactly what you will be repaying, regardless of whether interest rates fall or raise.
When your fixed rate mortgage has come to an end, you may then have a tie in period with the bank during which you have to remain with the bank and pay the variable rate product. This is the return for the lender when they have given you a very good fixed rate mortgage. A variable rate mortgage is the basic mortgage that a lender will have available. It is their basic no frills mortgage and changes with the base rate, although not always moving with the base rate exactly.
Usually mortgage brokers will suggest that all customers on the lender’s variable rate mortgages should look at their mortgage and consider switching to another product, or bank. It is usually not discounted in any way and is at risk of going up with every rate change. Some time this type of product is looked at as the lender’s way of making money. They are typically no frills, no reductions and a sign that you need to be reviewing your mortgage. If this is what you have got, then it is well high time that you decided to compare all mortgage rates and find yourself a brand new mortgage.
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