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What type of Interest Rate should I choose?
Variable
or fixed interest rates can apply to all types of mortgages.
Both have advantages and disadvantages. Read on to decide
which type suits your needs:
1. Variable Interest Rate
Standard variable rate (SVR) - when European Central Bank (ECB) rates rise, your lender can pass on the increase in whole or in part. Similarly, if ECB rates fall, your lender can pass on some or all of the reduction to you. The variable rates offered by a lender also depend on the lenders' costs of funds. Standard Variable Rates can change at the discretion of the lender if the costs of funds changes.
Tracker variable rate / tracker mortgages - this is set a t a fixed percentage or margin above the ECB rate. For example, it could be set at the ECB rate plus 1.25%. So, if the ECB rate rises by a quarter of a percentage point, so does your rate. It will also 'track' the ECB rate when this rate goes down. Once you sign for a tracker rate, you will continue on the same 'margin' for the course of the mortgage.
2. Fixed Interest Rate
With
the fixed interest rate mortgage, the interest rate applied
to your loan is fixed for an agreed period of time. This can
be for 1, 2, 3, 4, 5, 7 or 10 years.
During the 'fixed' rate period you know exactly how much you
have to pay each month and you avoid any risks associated
with interest rates going up and down. Some people prefer
fixed interest loans as it enables them to prepare a more
accurate budget.
At the end of the fixed rate period you may choose another
fixed rate period or select the prevailing variable rate. Fixed
rate loans are subject to an unwinding charge if repaid during
the fixed rate period in whole or in part.
Considerations Although
the fixed interest rate option removes the risk associated
with a fluctuating rate you must remember that if the variable
interest rate is reduced by economic conditions, you will
not benefit from any reduction in your monthly repayments.
You will continue to pay the higher rate of interest.
If you need to break the fixed rate, you will have to pay
a penalty, which will depend on the fixed rate term.
See Table of Current Interest
Rates
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