When you enter the world of mortgages you will hear lots of buzz words, most of which I will cover throughout this blog. One you will hear early on is “products”. Products relate to the interest rate that you are going to pay to the lender for borrowing your mortgage loan with them. I usually explain these as introductory rates that lenders offer to get you to go with them.
All products are easily divided into 2 categories, fixed interest rates and movable interest rates. Fixed rates offer you a set interest rate that doesn’t change for a set period of time- known as your tie in period, and are usually offered over 2 years, 5 years or even 10 years. If you opt for a fixed rate you will be given a monthly repayment figure that wouldn’t change during that tie in period. A moveable interest rate will be known as either, a variable rate, a base rate tracker, or a libor rate tracker and will can move, up and down, depending on what is happening in the finance world. (Standard variable rate- the lenders own interest rate, Bank of England base rate, and the rate that banks lend to each other- Libor). Moveable rates are a good option when interest rates are low or reducing. However, when you are buying your first home it is common for first time buyer to opt for a fixed rate. It is then like paying rent as you know what your payments are going to be for a set period of time, it also allows you to get used to the cost of running your own home.
Just a little bit on what a “Tie in period” is . If you take out a 2-year fixed rate, your interest rate will remain the same for that 2 year period however you will have what are called “Early Repayment Charges”. This means if you pay your loan back early during this time period you will be charged a penalty for doing this. This is because the lender won’t be getting the interest back that they are expecting you to pay for borrowing the money. So as a penalty they will charge you part of what they are losing out on. This charge is usually a percentage of the remaining loan amount and can anything form 1% up to 5% of the loan so could be a significant amount of month. It is therefore a good idea to ensure that you will want to stay in the property for this tie in period, to avoid being charged.
