HOMELOANS
BY
Interest Rates
The
"right mortgage for you" will be a combination of one or more of
the above mortgage types or products together with the type of interest
rate you prefer. There are
three main types of interest rate although just two types are offered by
the majority of lenders. These
rates are "Floating" or "Variable", "Fixed",
and "Capped".
Floating
/ Variable Rate: - Benefits:
•
Competitive interest rates which fluctuate with market trends.
•
Interest rate generally reviewable on one months notice being
given.
•
Provides greater flexibility for voluntary principal repayments
being made without penalty.
Floating
/ Variable Rate: - Disadvantages:
•
Interest rate movement can expose borrower to increased
payments.
•
Increased payments can place pressure on borrower's cashflows.
•
No limit on the interest rate and therefore repayment amount
that may be payable.
Fixed
Rate - Benefits:
•
Provides certainty of regular loan payments for duration of
fixed term.
•
Provides protection against increasing interest rates in
market.
•
Does not expose borrower's cashflows to risk.
Fixed
Rate - Disadvantages:
•
Borrower unable to receive advantage of reducing interest
rates.
•
Voluntary principal payments and early repayment generally
incur a penalty charge.
Capped
Rate – Benefits:
•
An interest rate with a known upper limit or "cap"
but possibility of a lower rate if interest rates fall during the term of
the capped rate.
•
Provides certainty as to the maximum interest rate for a fixed
term while retaining opportunity to benefit from any fall in interest
rates.
Capped
Rate – Disadvantages:
•
The
rate is normally higher than a fixed rate of the same duration.
NB.
The lender's current interest rate at the time you are gathering
information about your options or making an application will not
necessarily be the same as the interest rate that you start paying when
your mortgage is settled or "drawndown".
For floating rate mortgages, almost all lenders will apply their
then current floating interest rate (ie the floating rate as at the date
the mortgage is settled) to your new mortgage.
For fixed rate mortgages, some lenders will hold the "quoted
rate" (ie the fixed rate as at the date of loan offer acceptance)
until settlement or for a fixed period such as 30 or 60 days.
Some may charge an "interest rate holding fee" to do
this. Others
do not hold or reserve the rate but apply the rate as at the date of
drawdown.
These differences can be good or bad depending on whether rates are
going up or down!