Choosing the correct mortgage may save you hundreds of pounds, so it’s critical to understand how they operate. After you have a mortgage, you’ll have to pay an initial interest rate for a certain amount of time. This rate can be set and guaranteed not to vary, or it can fluctuate and increase or decrease.
Top Private Banks in Dubai offer different types of mortgages. These types carry different features and offer different benefits to lenders and borrowers.
Variable-rate mortgages are classified into two types: tracker mortgages and discount mortgages.
With a tracker mortgage, your interest rate ‘tracks’ the Bank of England’s base rate, which is presently 0.1 percent, for example, you might pay the base rate plus 3%. In today’s mortgage market, you’d generally take up a tracker mortgage with a two-year introductory term. Following that, you will be transferred to your lender’s normal variable rate.
There are, however, a few ‘lifetime’ trackers where your mortgage rate will match the Bank of England base rate for the duration of the mortgage term. When we polled mortgage consumers in September 2019, one in ten reported having tracker mortgages.
A discount mortgage combines the lender’s standard variable rate, a rate determined by the lender that does not very frequently, with a fixed amount reduced. For example, if your lender’s regular variable rate is 4% and your mortgage includes a 1.5 percent reduction, you will pay 2.5 percent.
Discounted arrangements can be stepped; for example, you might take out a three-year term but pay a lower rate for the first six months and then a higher cost for the following two and a half years. Some variable rates have a ‘collar,’ or a rate that they cannot fall below, or are capped at a rate that they cannot exceed. When selecting a deal, make sure to search for these aspects to ensure you understand what you’re getting into.
Fixed-rate mortgages have the same interest rate for the duration of the loan, regardless of interest rate fluctuations elsewhere. The most popular contract terms are two and five years, and after your fixed term expires, you’ll normally be transferred to your lender’s standard variable rate (SVR).
Whether you should go with a fixed-rate or variable-rate mortgage depends on if you expect your income to fluctuate, whether you like to know precisely how much you’ll be paying each month, and whether you’d be able to handle an increase in your monthly payments.
Fixed-rate mortgages were the most common mortgages in the poll, with 6 in 10 people having one. Five-year contracts were the most common.
Each lender has its own standard variable rate (SVR), which it may set at any level it likes – this means it is not directly tied to the Bank of England base rate. According to Money facts, the average SVR in July 2018 was 4.72 percent.
This is higher than the majority of existing mortgage agreements, so if you’re already on an SVR, it’s worth searching around for a new mortgage.
Lenders can modify their SVR at any moment, so if you’re already on an SVR mortgage, your payments could go higher – especially if the Bank of England base rate is expected to rise in the near future.
When you take out a mortgage, you will either have an interest-free or repayment mortgage, however, this is not always the case.
An interest-only mortgage requires you to pay only the interest each month, which means you must pay off the whole amount at the conclusion of the mortgage term.
A repayment mortgage, which is by far the most prevalent form of mortgage, requires you to pay down a portion of the loan as well as interest as part of each monthly payment.
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