House buying is a complicated business. First of all you’ve got to pick a location. For most, non-exorbitantly wealthy people this will be in an area that is not too expensive and not too crime-ridden (there will probably be some crime, but there is always some crime, unless you live in a wondrous utopia or a lawless dystopia). Once you’ve picked your area, you’ve got to pick your house. Hopefully it won’t be awful. Of course, it’s best to have a few backups in case your bid isn’t accepted, the house is taken off the market or you lose all your money in a complicated pyramid scheme that, at the time, seemed too good to be true and in actual fact turned out to be entirely that.
One of the final steps – along with the bidding process, the signing of contracts, legal wrangling (isn’t wrangling a great word?) and many a bank meeting – is negotiating the tricky world of mortgage rates.
A mortgage rate is essentially the amount you are charged to borrow money. This rate is determined by all kinds of things, many of them economic. One of the big influences on mortgage interest rates is that hoary old economic phrase: supply and demand. It affects everything from the price of a pint of milk to the price of a half pint of milk. And other stuff too. If the property market is booming and a lot of people are looking for mortgages the interest rate will go up. If on the other hand the market is not in peak condition then interest rates will fall to help encourage interest in the property market.
Another, more personal, issue that is going to affect the interest rate you are offered is your credit rating. This lifelong irritant can really screw thing up. Whether you’re looking for a giant mortgage or a phone contract, you got to have yourself a decent credit rating. If you don’t, well you might just be considered high risk and get yourself stuck with a high interest rate. Of course, impeccably credit rating and your interest rate will be low.
Either way, there’s not much you can do to affect either your credit rating (right now at least) or the current demand in the property market. What you can choose is the kind of mortgage you get. There are three principal mortgage types.
Fixed rate mortgages
A fixed rate mortgage allows the property owner to pay the same rate of interest throughout the entire life of the mortgage. Now as you might imagine this is great if you get a low interest rate and the economy suddenly picks up. You wind up saving a fair bit of money. Of course, if interest rates drop you could be stuck paying a lot more than you wanted to. If interest rates stay down for a long period of time you could potentially refinance you current mortgage to take advantage of this.
Variable Rate Mortgages
The alternative to a fixed rate mortgage is, of course, a non-fixed one, or a variable rate mortgage. That means your interest rate is determined by the current interest rate. If the interest rate is low, your interest rate stays low. The interest rate is generally updated every two years or so and if it does go up in that time then you could get laboured with a high interest rate, at least for a couple of years.
These are sort of like variable rate mortgages (mainly because the interest rate varies) but are not quite the same. Tracker mortgages are generally linked to the Bank of England’s base rate (this is the rate the Bank of England charges banks for secured lending and impacts everything from mortgages to savings). So if the rate falls you’re in luck, if not, hard luck.
Capped Rate Mortgages
Another variant of the variable mortgage with one subtle difference (the clue is in the title). Interest rates are paid at the lender’s standard variable rate. However if it rise above a predetermined threshold it is capped and will rise no further.
Interest Only Mortgages
An alternative is the interest only mortgage that means you only pay the interest on what you’ve borrowed for a certain period of time. This has plenty of advantages in the short term: lower payment rates, spare cash. However you will have to pay the full amount eventually and unless you plan on investing the money you save in the short term it’s probably best to go with option number one or option number two.
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What is the current base rate of interest as set by the Bank of England?
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