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Mortgage Interest Rates - part 2
Discounted rates
A discounted rate mortgage is where the lender gives you a discount on their SVR. So while the repayments will move up and down with fluctuations in the base rate, so will your repayments. But you will have an extra discount on top of it.
Tracker rates
A tracker mortgage tends to run for the whole period of your mortgage, unlike discounted and fixed rates mortgages that run for a set period.
How they work is that the difference between the Bank of England base rate and your mortgage rate is fixed. So, as an example, your mortgage might be set at 0.75% above the base rate.
So, when the Bank of England base rate goes up or down, the tracker mortgage will do so to. This is good if you want to ensure that a cut in the base rate will reflect on your mortgage repayments. Though, of course, they can up as well if the Bank of England base rate does too!
Capped rates
A capped rate mortgage ensures that there is a limit to the interest rate you will pay over a set period of time. So, if your lender\'s variable rate goes higher than the capped rate, you will benefit. If the variable rate falls below the capped rate, then you will pay the same as everyone else.
Capped rate mortgages are good when you are on a tight budget as you will know that your mortgage repayments will never go higher than a certain amount.
Interest charging
An important question to ask when choosing a mortgage, no matter what type of interest rate you decide to go with, is how frequently interest is calculated.
You will pay much less in interest if you have a mortgage where the interest is calculated daily. This type of interest charging is sometimes called an Australian mortgage.
If your mortgage is one where the interest is calculated monthly, you could wait a whole month after making a payment before the interest is recalculated. This means that you are paying interest on money that you don\'t actually owe any more!
Which type is best?
So, now you have had a crash course in mortgages! How do you choose the right one for you? Try comparing the monthly repayment figures quoted to you rather than looking at the interest rates on offer so that you get a true picture of what you would be paying.
And don’t forget to take in to account any other costs like the mortgage application fee.
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