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A Bit About Rates

Paying the Interest on your Mortgage

You have to pay interest on any debt, and mortgages are no different. They differ only in the range of options offered.

Variable Rate

This means you pay the 'going rate' on your loan. The mortgage rate changes every time interest rates change or, as in most cases, the overall effect of any interest rate changes is calculated once a year and payments are altered accordingly. Whatever kind of mortgage you start with, it is likely to change to variable rates at some point.

Fixed Rate

The interest rate is fixed for the period agreed - often two to five years. These are ideal for budgeting or if you think rates might increase. You do not benefit if rates fall, and will face penalties if you try to quit. There will be a booking fee to secure the rate too.

Very low rates may tempt you, but they can be used to trap you into paying over the odds at a future date. Check how long you will have to stay with the lender before you can switch without penalty.


Capped Rates

These are fixed, or capped, at an upper level, but if rates fall you get the benefit of paying the lower rate. Such deals can be a good for budgeting as you know what the maximum is likely to be.

Cash-back Deals

This is when lenders offer money back if you take out a particular product. However, nothing comes free in life and cashback mortgages may be weighed down with hefty penalty charges if you later want to switch lender.

Discounted Rates

Under this type of mortgage the borrower is offered a discount off the lender's variable rate. The rate paid will fluctuate in line with changes in the variable rate. The discount applies over a set term.

Source: BBC Business News 24/04/07

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