Variable Rate Mortgages – What Are They?
A mortgage is a loan used to help people buy a home or other form of property. And just like any other form of loan, the borrower be will required to pay interest on the amount of loan that is outstanding at any single time. There are different types of mortgage but there are two ways that the interest is calculated; by means of an variable rate or by a fixed rate. In this article we will look at the Variable Rate Mortgage.
With this type of mortgage the interest rate is not known through the life of that home loan. The rate will vary depending how interest rates are set in the money markets by the Bank of England. If the LIBOR as it is known, goes up, then variable rate mortgages will rise too. Conversely, if the LIBOR declines then so will variable rate mortgages. Therefore, neither the lender nor the borrower knows for certain how much interest will be paid on any of these mortgages.
For borrowers a variable rate can be a useful mortgage if they expect that overall market rates will fall in the future. They can take the risk that rates will decline and therefore so with the interest rate on their mortgage. However, there is also the risk that rates will increase. Currently mortgage rates are very low so the chances of a reduction in mortgage interest rates is very low. A few years ago in 2006 it was common to see rates at four percent higher or even more.
How is interest calculated for a variable rate mortgage?
Sometimes the interest is charged on the daily outstanding balance and at other times it is on the month end or even the year-end balance. By calculating interest every day, it will be fairer to the borrower since the total balance reduces every time a payment is made and, as a result, the interest will be less. For other instances calculation of interest is on monthly or annually basis. If the interest is calculated on an annual basis this can be very expensive. This is because one will be forced to pay the same interest for a complete even if the there is a reduction in Variable Rates which would lead to a lower repayment. Your mortgage broker can advise you on this aspect.
True Interest Rate
Many people think that the interest rate they see advertised is the rate on interest they are paying. However, a mortgage often has other costs associated with it. These include establishment fees, mortgage insurance, income protection and other costs which are often added to the loan. The interest is charged on the total money and this true rate of interest is known as the Annual Percentage Rate or APR. How the interest is calculated, whether daily or monthly, will affect the APR. This is the number you need to look at when you compare variable rate mortgages in Harrow.
Choosing a Variable Rate Mortgage in Harrow
If you are buying a home, then you may want to take advantage of falling interest rates in which case you should choose a variable rate mortgage in Harrow. However, as with all financial decisions, you should seek the help of professionals such as a Harrow mortgage broker. They can help you understand more about Variable Rate Mortgages. Here is some more information for you.