Best Mortgage Deals
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best mortgage deals by AnnaUnderstanding interest rates is one of the keys to success in finding the best mortgage deals. As we have seen there are two principle types of mortgage, the repayment and interest only which define the mortgage in broad terms. Now we start to peel back the layers and look at the constituent elements of which the interest rate is by far the most important. Unfortunately it is a minefield as there are literally thousands of products, all with different names and different interest rate offers, so what I have tried to do here is to group them into broad categories again ( much like the mortgage types), and then in the next few pages we will look at specific types of mortgages for particular markets. In the table below I have explained all the various types and also the pros and cons of each type which I hope you find useful. As a preamble, I thought it would also be useful if I explained LIBOR rates, how banks lend to one another, and how this affects you and your mortgage rates.

Best Mortgage Deals - Inter Bank Lending Rates

In the UK there are two interest rates that you need to be aware of as a mortgage investor looking for the best mortgage deals. The first is the BOE rate, the second is the LIBOR rate. When these two rates move out of kilter, as is currently the case, then your mortgage repayments will rise. So how do these rates differ and why are they important.

The first rate, the BOE rate is set by the Bank of England. It is the one that is announced at the monthly BOE monetary policy meeting, generally at noon on a Thursday. It is the rate that gets the headlines in the news, and is eagerly awaited by the financial markets around the world, and it used to be the one that governed your mortgage interest rates. If the bank cut rates, then the mortgage lenders would follow suit - not any more. Why - because the banks no longer trust one another following the sub prime crisis which has swept the financial markets around the world. So what does govern the rates at the moment? - it is called the LIBOR rate.

LIBOR stands for London Interbank Offered Rate and is the wholesale rate at which banks will lend to one another. The principle difference from the BOE rate, is that LIBOR is set by market conditions, or supply and demand if you like, not by the BOE.  So when money is in short supply rates rise, and when there is an oversupply then rates fall. Each week the BOE holds an auction ( unlike any other ) where the banks 'bid' for money. In the latest weekly auction, the money supply was over-subscribed three times, causing LIBOR rates to spike up to over 6.5%, 1.5% above the BOE rate.  These rates vary, daily and monthly, and you may have come across the 3 month LIBOR rate which sets rates 3 months in advance, which has been hovering around the 6% level. As the LIBOR rates rise, so do your mortgage repayments, since banks are not going to lend to you at a loss! The BOE rate becomes almost irrelevant as banks scramble for the money that is available, and rates then  rise. There is also another element, in that with money in short supply, the banks only lend to customers with a good credit history. In addition it also allows them to make higher margins, as fewer products mean more customers desperate for those mortgages that are available, making finding the best mortgage deals even more difficult. Indeed, many banks are now artificially inflating the market, pushing rates up all the time to increase their margins in what is in effect a sellers market for them.

The same is happening in Europe, with the Euro LIBOR rate reaching 4.75% against an ECB rate of 4%.

Best Mortgage Deals UK - Types of Interest Rate Deals

Type Of Interest Rate Deal Main Principles Early Settlement Penalties Key Points
Standard Variable Rate or SVR Your repayments will vary according to the lender's own interest rates. These will be governed by the BOE rate or LIBOR Generally there are no penalties, but always check to make sure Generally these mortgages are very flexible, but that flexibility comes at a price, as they will be more expensive than other mortgage deals, so not the best. Rates may not necessarily change even if the BOE cut rates. Monthly payments will change as rates change, and you should be able to re-mortgage with another lender with no penalties. Capital can generally be paid off early, again with no penalties but do check first.
Tracker Rate Another variable rate mortgage like the SVR. Rates are 'pegged' against a base rate, often the BOE rate or some other base rate set by the lender. The rates then track up and down and your repayments change accordingly There may be penalties in the early period of the mortgage, particularly if the lender has offered an 'introductory' rate. Again please check the small print. They may even apply after the end of the incentive period! Like all variable rate mortgages, you must be comfortable that you will be able to afford higher rates should interest rates increase, so it's not a good choice if you are on a tight budget.
Discounted Interest Rate Typically the lender will offer a discounted rate for the first year, or even two. Your monthly payments may go up and down. Thereafter rates will revert to 'market rates' and generally to a standard variable rate plan. Typically offered to first time buyers. Be careful. Penalty charges will apply both in the discounted period and for some time after. These can be high as the lender needs to recoup the costs of providing you with a discounted product, so be careful. For first time buyers this provides one of the best mortgage deals, as money can be tight as a first time buyer with lower payments in the early years, but be careful. There will be a sting in the tail of penalties for early exit or part settlement, rates may or may not change as market rates change, and finally you must be confident you will be able to make the higher payments once the discounted period is over.
Fixed Interest Rate With this mortgage type the rates are fixed for a certain period. At the end of the period you will normally move to standard variable rates. Again, be careful. Penalty charges will apply for early settlement and 100% repayment, both during and after the fixed rate period. With this type of mortgage you always know what you will be paying so can budget accordingly ( while on the fixed rate period). You don't of course benefit if rates go down, so it's a gamble, but if rates go up, your payments also stay the same. So if you believe you know where rates are heading in the future, then it could provide one of the best mortgage deals.
Capped Rate Your payments are variable, but fixed not to go above a certain level. In other words they are capped during the period of the deal. At the end of the period you would typically move to an SVR Penalty charges will almost certainly apply, as with most 'incentive' mortgages, so always check the small print. Again this sets a budget for you as you know your repayments will never go above a certain amount during the capped rate period. You will still benefit if rates fall.
Collared Rate A collared rate mortgage may be used in conjunction with a capped rate or a tracker (or both). Your payments are variable but will not fall below a set level (the 'collar'). Penalties are not usually applied, but may be if used in conjunction with a capped rate or tracker It may be part of another interest-rate deal which otherwise appears attractive. But please remember that if the rate payable is only just above the 'collar' and you think rates will fall, you may not get the full benefit of a reduced payment.

 

OK - I hope the above has given you a feel for interest rates and the various options available in the market. Now let's look at how these are incorporated into the various market sectors for the best mortgage deals available. Let's start with self cert mortgages.

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