The bestselling one-stop guide to mortgages—updated for the post–housing crisis market! The Mortgage Encyclopedia demystifies all the various mortgage terms, features, and options by offering clear, precise explanations. Fully updated to address the new realities introduced by the housing crisis of 2007, The Mortgage Encyclopedia provides not just a complete description, but als…
A new edition of an authoritative guide to managing every stage of one`s financial life provides accessible recommendations for a wide variety of topics, from credit cards and mortgages to 401(k)s and insurance, in a reference that also includes covera…
Variable Rate Mortgages, are They the Best Choice?
The mortgage market as a whole is in a pretty poor state at the moment, sub-prime lending in the United States has had a knock on effect on banks worldwide and the main effect that people are seeing is that home repossessions have increased exponentially since this tough time has started.
The much publicised collapse of the bank Northern Rock has also contributed to the increasing problems with banks in this country. Credit or any lending in this country is becoming harder to find as banks are busy trying to recoup some of the money lent out in the past few years never mind the thousands of people looking to get new mortgages, credit cards and loans.
In an aid to help ease the impact of this credit crunch the Bank of England’s base rate on mortgages has dropped three times already since December of last year. The most recent of these percentage drops went from 5.75% to 5%. This means that people with variable rate or “tracker” mortgages could have made the best choice as a family with a £100,000 interest only mortgage would now have significant reductions in their repayments by £750 per year.
Before people start scrambling from their fixed rate mortgages they need to know the difference between the two type of variable rate mortgages; Tracker mortgages follow the Bank of England’s base rate and so if the rate increases or dips then so will the interest on your mortgage. Conversely a discounted variable rate mortgage follows the lender’s Standard Variable Rate (SVR) which doesn’t follow the Bank of England, and can change for the better or worse whenever the lender feels like it.
With the impending prospect of a recession in the United States and the credit crunch in full flow many lenders are reluctant the pass on the savings brought about by the Bank of England’s cuts, for example the troubled bank Northern Rock has only dropped their rate by 0.35 of a percent in an attempt to possibly recover from their near-demise.
Whilst mortgages are a risky subject at the moment it is clear that whilst the variable rate mortgages look the most attractive at this point there is every chance that as time goes by the national rate will rise back up, especially since there have been three drastic drops in the space of half a year. The alternative of a fixed rate mortgage may mean you get a decent deal but paying slightly more.
Long term mortgages (some up to 40 years) may have better rates as you are going to be with then for a longer period of time and more likely to be able to make the payments as they will be spread apart for smaller monthly repayments. Getting a mortgage now or even remortgaging is going to take more time and attention to the details to make sure you don’t end up with a deal that will hurt you in the long run, take all the advice you can get on the matter and don’t be afraid to look elsewhere if you aren’t getting the deal that’s right for you
About the Author
Andy Adams is an IT worker and experienced writer
Mike Morisset Mortgage Minute – Episode #8 Variable Rate vs Fixed Rate Mortgages
The bestselling one-stop guide to mortgages—updated for the post–housing crisis market! The Mortgage Encyclopedia demystifies all the various mortgage terms, features, and options by offering clear, precise explanations. Fully updated to address the new realities introduced by the housing crisis of 2007, The Mortgage Encyclopedia provides not just a complete description, but als…
Demystified: Fixed Rate Mortgage and Variable Rate Mortgage
Fixed mortgage rates are decided by the price of government bonds and the bond yield. Investing in bonds are in general considered safer than stocks, and as soon as there is financial turmoil, investors normally will unload equities in preference to bonds, particularly Government bonds, and at the same time as the stock market is thriving, investors in all probability would make a higher return on investment in equities. This way there is a lower demand for bonds; as a result, their valuation decreases that add to their yield. On the other hand, as soon as the economy turns out to be less stable and stocks do not look as attractive, the demand for bonds rises that reduces their yields.
As soon as the governments’ long-term bond prices, for instance the 5 year, increases, this results in a lower returns, in general plummeting the five year borrowing costs for mortgage lenders who can then pass on these savings to customers in the shape of lower 5 year fixed mortgage rates. On the other hand, during these exceptionally odd times, caused by inadequate liquidity in the markets, across the world banks are timid to lend to each other and are flush with cash, soaring borrowing costs this results in lenders having to pass on this increase on to customers in the shape of high fixed mortgage rates.
When it comes to variable mortgage rates, Bank of Canada plays a huge role in influencing variable mortgage rates for the reason that overnight target rates are set by the bank and is described as, Intraday average interest rates between financial institutions/banks. On this, banks base their Prime Lending Rates and the Bank of Canada does not interfere on lender’s Prime Rates and are independently determined by each financial institution/banks, further these are based on the cost of short-term money.
Variable mortgage rates that are advertised by banks are directly depended on Prime lending rate, which means that the interest rate you will be paying is directly associated to the Prime rate, and will change each time this changes. As a result, if the Bank of Canada cuts rates by 1% or 100 basis points, lenders mostly follow the bank and reduce their Prime rate too, given that their cost of borrowing falls, this means that your payments on a variable rate mortgage will reduce. This is an excellent choice if interest rates are plummeting. However, at present due to economic crisis banks have stopped lending to each other in the short-term, for the reason that they are fearful they might not get their money back thanks to the volatility in the system. Accordingly, inter-bank lending rates have risen and this increased cost is now being passed on customers by increasing interest rates.
Now it all comes down to which is a better option, fixed rate mortgage or a variable rate mortgage. This in fact relies on, each person’s condition and whether he or she can handle the varying mortgage rate payments both monetarily and psychologically for the reason that the last thing you would like to do is being concerned given that interest rates could rise. Otherwise if you would feel more relaxed knowing the stable fixed rate you would be paying, over the next few years. As a final point, it is up to you to choose which will be best for you fixed rate mortgage or variable rate mortgage.
About the Author
Chris is an expert in the field. For more information on buisness mortgage
and on best mortgage rates
Please visit: http://www.ratesupermarket.ca
Variable Rate or Fixed Rate Mortgage? Susie Inglis reflects on Bank of Canada rate announcement
The bestselling one-stop guide to mortgages—updated for the post–housing crisis market! The Mortgage Encyclopedia demystifies all the various mortgage terms, features, and options by offering clear, precise explanations. Fully updated to address the new realities introduced by the housing crisis of 2007, The Mortgage Encyclopedia provides not just a complete description, but als…
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