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It can be rather difficult working out the type of mortgage you would prefer to take out. Generally speaking the type of mortgage you choose determines how you repay the amount borrowed. The interest you repay on your mortgage is also linked to the Bank of England’s base rate, meaning that a change in the base rate could mean you pay much more or less over the term of your loan. There are several different types of mortgage so it’s a good idea to get an understanding of the different ones and what they all mean, so you can make the right decision to suite you.

A standard variable rate mortgage means that the rate would be charged by your mortgage provider but could go up or down depending on both the Bank of England’s base rate and their own performance. If a lender is doing particularly well their rate may drop, however conversely if they are in any financial difficulty they may increase their rate to discourage further lending.

One of the most popular mortgage options is a fixed rate one, which means that you can choose to fix the rate of your mortgage over an agreed period of time. Whether it is for 12 months or the entire term of your mortgage, this means that regardless of any fluctuations with the base rate or indeed your lender, your repayments will remain the same.

A capped rate mortgage is a combination of a variable and fixed rate option. This means that your rate could potentially increase or decrease depending on the Bank of England’s base rate or lender’s rate but it will be capped at an agreed amount and will therefore never go over that amount.

A discounted rate means that your repayment is offered at an agreed percentage below the Standard Variable Rate. This also means that even though your interest rate may go up or down to reflect changes in base rate, your payment will still remain lower than the Standard Variable Rate for the discounted period. However it is worth noting that there is no guarantee that you will benefit from any drops in interest rates as the lender is not obliged to pass on changes via the Standard Variable Rate.

A base rate tracker mortgage means that your interest rate is linked directly to the Bank of England’s base rate, and therefore your repayment will go up or down according to the base rate. However although you could end up paying a lot less for your mortgage, there is also the risk that you could end up paying much more if the rates increase.

Many factors will affect the changes in interest rates or base rate which will consequently affect your repayments. As a result of the recession for example, the base rate fell to .5% meaning that some people with favourable base rate tracker mortgages would end up having very little to pay, but obviously fixed rate mortgages would not be affected. Whatever you choose to do, it is important to gain valuable advice from a mortgage or financial advisor who is regulated by the Financial Services Authority.

by Cormac Henderson

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