Variable rate mortgages
Variable rate mortgages explained
A variable rate mortgage or floating rate mortgage is a mortgage loan where
the interest rate varies to reflect market conditions. The interest rate will
normally vary with changes to the base rate of the central bank and reflects
changing costs on the credit markets. This method of variation directly linked
to underlying costs benefits lenders by ensuring a profit by passing the
interest rate risk to the borrower. The borrower benefits from reduced margins
to the underlying cost of borrowing compared to fixed or capped rate mortgages
where the lender must hedge against potential interest rate changes where the
borrower benefits if the interest rate falls and loses out if interest rates
rise. The loan may be offered at the lenders standard variable rate/base rate.
There may be a direct and legally defined link to the underlying index but where
the lender offers no specific link to the underlying market of index they can
choose to increase or decrease at their discretion. In many countries variable
rate mortgages are the standard method of lending and are simply be referred to
as mortgages. In the US they are referred to as adjustable rate mortgages.
A Repayment Mortgage
A repayment mortgage is a term generally used in the UK to describe a
mortgage in which the monthly repayments consist of repaying the capital amount
borrowed as well as the accrued interest. The mortgage statement, usually
received annually, shows the amount borrowed decreases throughout the term. The big advantage of a repayment mortgage is that at the end of the mortgage
term, the full amount of the debt has been repaid. It also removes the risk of
having an investment, the performance of which is dependent on the stock market.
The borrower is less likely to suffer from negative equity because the mortgage
balance will be reducing month on month. As time moves on, the equity percentage in the property increases. However, in
the early years the bulk of the mortgage repayments consist of the interest
component, so not much of the capital is actually paid off for some time. For a mortgage enquiry please contact
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