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As well as repaying the amount you borrow, you will have to pay interest on the loan to the lender. There are deals that mean you pay less interest to start with, but check the small print for drawbacks. Whether interest is charged daily or annually can also affect how much you pay altogether. Standard rates and special deals A lender's basic mortgage will usually be at what's called the standard variable rate of interest (or SVR) which goes up and down as bank interest rates change. It is not always easy to compare rates of different lenders, but the annual percentage rate (APR) must always be shown in advertisements or leaflets. The APR is higher than the SVR because it includes one-off charges like arrangement and valuation fees. If a mortgage starts with a low fixed rate of interest which will increase to the SVR after a number of years, the lender must include this in the APR calculation. The APR should give a more accurate picture of how one mortgage compares with another. Many lenders offer cheap rates or special deals. The deal you choose will affect: - if and when the interest rate can go up or down after you've got your mortgage
- how flexible the mortgage is if you want to vary your payments or stop your payments for a few months (take a payment holiday).
Back to top Fixed-rate mortgages These guarantee that the interest rate won't change for a stated period (often from two to five years). This means you don't have to worry about increased payments in the first few years if interest rates go up. However, if the lender's standard rate falls below your fixed rate, you will lose out. You may be able to get a deal where you borrow part of your mortgage at the variable rate and part at a fixed rate. This protects you to some extent whether interest rates go up or down in the future. Back to top Other deals There are a number of other deals available. If the rate is discounted for the first few years, the stated APR must take into account the higher interest rate for the rest of the term. Discounted-rate mortgage With a discounted-rate mortgage, the interest rate may go up or down, but for a stated period it is always, for example, 1% lower than the standard rate Tracker mortgage With a tracker mortgage, the interest rate exactly follows the Bank of England base rate plus a specified percentage Capped-rate mortgage With a capped-rate mortgage, the interest rate is guaranteed not to go above a certain level during the capped period. The capped period is usually between three and five years Capped and collared mortgage A capped and collared mortgage sets a minimum as well as a maximum rate for a period of time. Back to top 'Flexible' and current account mortgages Some lenders now calculate your balance daily rather than annually. This is a good thing, because it saves you interest in the long run. It is one of the requirements of a CAT mortgage. Where lenders do this, you can often go for a flexible mortgage. This gives you more freedom to repay at the speed you choose. You may be able to: - increase or decrease your monthly payments
- build up credit you can draw on
- take a payment holiday where you pay nothing for a few months
However, you are unlikely to get this flexibility and a very cheap interest rate. A current account (or all-in-one) mortgage combines a flexible mortgage with a current account in one package. Money in your current (or savings) account can be set against the amount you owe on your mortgage or other borrowing, so that your interest payments are reduced. Back to top Watch for snags A cheap rate or a flexible deal may have strings attached, so ask your adviser or check the small print in advertisements. For example, the lender may require you to take out your house insurance or mortgage protection insurance through them. There may also be a big redemption penalty if you repay your loan early or switch to a better deal in the early years of your mortgage. This could wipe out all the savings you made on a special deal. Back to top
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