The Bank of England is not the sexiest place in the world. But once a month, financial experts and - increasingly - home owners await with baited breath the results of the Bank's review of the base rate of interest. This month's quarter-point increase puts the rate at 4%.
Of course, when the rate goes down, lenders take their time to pass on the benefits. But increases seem to appear on your monthly mortgage statement like lightning. For anyone with stretched finances or those who enjoy the security of knowing that their monthly mortgage payments will not rise beyond a set amount, there are ways to beat the base rises.
Cap it
With a capped rate mortgage you pay the standard variable rate but your lender will set an upper rate - or cap. Your interest rate is guaranteed not to rise above this level for the period the cap is in place. This has an obvious advantage during times of high interest rates. Plus, you get the best of both worlds, in that the amount you pay will never rise beyond a certain amount for the period of the deal but it could fall if the lender's standard variable rate (SVR) falls during the period. The price you pay for this security is that deals may be less competitive than fixed and discounted rate mortgages. You can cap for a range of periods, from six months to five years.
Track it
Tracker rate mortgages are more closely linked to the interest rate set by the Bank of England. Your interest rate will follow changes in the base rate - usually by a certain percentage such as base rate plus 0.75%. It is not linked directly to your lenders SVR. Again, this is great when rates are low but higher payments should be also be considered if rates increase.
Fix it
As the name suggests, fixed rate mortgages fix the rate of interest for an agreed period - say, two, five or ten years. This means that your monthly payments are guaranteed not to rise beyond the fixed amount, making fixed rates attractive to those seeking security. However, at the end of the fixed-rate period, borrowers will typically be converted to the lender's standard variable rate. At this stage, most borrowers start to look around for another deal as SVRs are notoriously uncompetitive. If a fixed rate mortgage carries an extended redemption tie-in which binds them to the lender for several years after the fixed rate period has expired. This is often where the lender can make its money. Most experts agree that extended redemption tie-ins are best avoided because today's hugely competitive mortgage market means there is always a better deal to be had.
Key points
- Most of us are not economics experts. Take advice if you are uncertain about the future direction of interest rates. You could save more money by taking out a fixed or discounted rate mortgage on a lower rate.
- Make sure that the length of the capped or fixed rate suits you. You might save more money by signing up for a higher rate set for a longer period.
- Watch out for extended tie-ins and redemption penalties which may lock you into a deal long after it ceases to be competitive.
- Check that the lender does not apply a minimum rate of interest
- Take time to read all the small print. Be particularly careful to check for penalties for paying your mortgage off early or missing a payment. Make sure you know what you're buying and check dates for when any discount or fixed rate runs out.
