With interest rates dropping to a historic low, now is an excellent time to be looking for a new mortgage product in the hope of saving some monthly financial budget, and hopefully a lot of cash in the future. But if you are beginning to compare mortgage loan rates, what precisely are all of these different types of mortgages available from banks?
To start off with, for about a third of mortgage holders, the fixed rate mortgage is the desired type of product. With this type of mortgage you have agreed with your chosen lender that for a certain amount of time you will be charged a fixed . The fixed term duration might be a few months up to several years, it depends on the offers you can select from on the market. How low the interest rate is will depend on how long you are signing up to it. The shorter the time period, the less risk there is to the lender that the rates could increase in that time period, so normally the interest rate offered is typically better. It is this fixed aspect of the mortgage that many mortgage holders do like. For the agreed time you know exactly how much you will be paying out for your mortgage. There can be no interest rate increase surprises to affect your budget. You know that unless you move your mortgage, precisely what you will be paying.
But this is not only seen as an advantage, it is also seen as a disadvantage. If base rates do drop more, as has happened drastically currently, then the rate that you are paying doesn’t reduce. And this is the gamble of this type of mortgage. You know exactly what you will be paying, regardless of whether interest rates increase or decrease.
After your fixed rate mortgage is over, you might then have a tie in period with the lender during which you have to stay with the bank on their variable rate product. This is the return for the lender when they have given you a particularly good fixed rate mortgage. A variable rate mortgage is the basic mortgage that a bank will have available. It is their basic no frills mortgage and moves with the base rate, although not always moving with the base rate exactly.
Usually mortgage brokers will advise that all customers on the lender’s variable rate mortgages should review their mortgage and think about switching to another product, or lender. It is usually not discounted in any way and is at risk of going up with every rate change. Quite often this type of product is looked at as the bank’s way of earning money. They are typically no frills, no savings and a sign that you should be looking at your mortgage. If this is what you have got, then it is well high time that you decided to compare mortgage rates and find yourself a brand new mortgage.
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