The interest rate is one of the most important aspects of any loan. A high interest rate will significantly drive up the cost of a loan, while a lower one will do the opposite. Individuals with a very good credit score qualify for the cheapest loans and people with average-to-bad credit, the most expensive. A bad credit mortgage loan can be incredibly expensive and is something that most people will want to avoid. Individuals that are only able to qualify for mortgage loans with high interest rates due to their credit, might do better renting rather than buying, until they are able to improve their credit score.
When deciding on an interest rate, it is best to make a few considerations. They include but are not limited to, the amount of money a person wants to pay out each month in mortgage payments, whether or not they want to pay interest-only or both interest and the loan’s principle and if they’d like a flat rate or one that is variable. Only after considering the aforementioned, will individuals be ready to make an informed decision.
Interest Rate Options
Discounted Rate: A discounted rate is one in which the initial loan rate is a discounted or reduced. Later, after a pre-determined amount of time, the rate will change. The new rate is oftentimes the lender’s Standard Variable Rate, which we will discuss next.
Standard Variable Rate: A standard variable rate will mirror the mortgage lender’s standard interest rate, which is often based on the Bank of England base rates.
Fixed Rate: A fixed rate is different from a variable one. While a variable rate changes, a fixed rate does not. The borrower enjoys the same rate for the length of the loan. The only exception to this is when a rate is only partially fixed. These types of rates are fixed for a set period of time. After that time is up, the rate changes.
Standard Variable Rate with Cash Back: With this type of rate, the borrower receives a lump sum of cash, in addition to the mortgage loan. The loan’s variable rate will generally last for a set period of time.
Tracker: Tracker interest rates are tied to a base rate, which is often times the Bank of England’s rate. Because they variable they are continuously rising and falling. These may appeal to people when rates are low. However, they won’t when they rise. For some people, the risk of the rate being raised is worth the lower rates they sometimes enjoy.
Capped/Cap and Collar: A Capped rate is one in which the borrower accepts a variable rate with a cap, meaning a person’s payments will never rise above a certain amount for a set period of time. A Cap and Collar rate loan is identical to the above, with one exception. The rate’s collar means that there’s a floor on how low the rate can get.