Variable Rate Mortgages

A variable Rate mortgage is one that changes when the lender announces interest Rate changes.

So unlike a Fixed Rate, if the mortgage rate goes up then you will be paying more each month.

Equally if it goes down then you will pay less.

Advantages

• Your monthly repayment will fall with reductions in interest rates
• Gives you flexibility

Disadvantages

• Your payments will rise with interest rates
• Does not give you the ability to budget for repayments

Flexible & Current Account

These types of mortgages have been introduced more recently. They have been introduced to cater for the changing patterns in working and life styles.

There are several attractive features, one of the main ones is that interest is usually calculated daily rather than being applied monthly or yearly. This means that interest does not accumulate and therefore, monthly repayments are kept to a minimum.

This type of mortgage also allows over payments. So if you decide that you wish to pay off a lump sum you can do so and by doing so reduce the interest. This can make quite a big difference to how much you pay in interest over the course of the mortgage and allows you to pay the mortgage off early if you wish.

You can also draw down overpayments should you need the money you overpaid at a later date.

Current Account mortgages group together all your borrowings and saving. This means that all your borrowings area at the Mortgage Rate, which is usually considerably less than personal loans and credit card rates.

Usually you have your savings held in this type of mortgage and your salary paid into it. This means that as interest is calculated daily you only ever pay interest on the actual amount you owe.

Advantages

• Daily Interest
• Over payment facility – potential to reduce amount paid in interest and reduce the term
• Under payment facility – particularly useful in times of hardship
• Current Account Mortgages give good rates of interest on borrowings and savings
• Current Account ensure your interest payments are kept to a minimum

Disadvantages

• These mortgages need to be managed carefully to take advantage of the benefits and to, more importantly, make sure they are repaid at the end of the period of the loan. This makes them less attractive to people who do not want to have to manage their mortgage.
• This type of mortgage could encourage people to over stretch themselves on their borrowings

LIBOR (London Interbank Ordinary Rate) and Tracker Mortgages

These mortgages are a variation of a Variable Rate Mortgage. They guarantee to be a certain percentage in excess of the London Interbank Ordinary Rate (which is the interest rate that the Bank of England lends to commercial banks) or the Bank of England Base Rate in the case of most Tracker mortgages.

So as the LIBOR or Bank of England Base Rate change LIBOR or Tracker Mortgage Rate does by the same amount. If the Bank of England Base Rate were 5% and the Tracker Mortgage guaranteed to be 2% greater, then you would be paying 7%. If the Base Rate were then to go up 1% to 6% you would be paying 8% (i.e. new Base Rate (6%) plus the 2% guarantee).

Advantages

• The interest rate you pay moves immediately that the Base Rate changes. Lenders rarely pass on changes to borrowers immediately
• You are guaranteed the percentage rate that your loan will exceed the Base Rate by. This prevents you from suffering from your Lender becoming uncompetitive with their existing borrowers standard variable rate

Disadvantages

• You are guaranteed to make sure get a competitive rate above the Base Rate and that the Lender uses is also competitive as this can some times be a rate set by the Lender rather than using an independent rate such as LIBOR or Bank of England Base Rate
• When rates rise you are subject to the increase immediately