Unit 6:23 Rates

Question 1

Standard variable-rate mortgage

Answer 1

• Interest rate fluctuates with market rates, rising or falling when Bank of England base rate changes
• Lender has discretion whether/when to adjust SVR following base rate changes
• Lenders often criticized for quickly implementing rate increases but delaying rate decreases

Question 2

Discounted-rate mortgage

Answer 2

• Offers a discount from lender’s standard variable rate for a specified initial period
• Designed to attract new customers, similar to fixed-rate product introductory offers
• May feature stepped discounts (e.g., 1.0% first year, 1.25% second year, 1.5% third year)
• Some lenders gradually reduce discount over initial years

Question 3

Tracker mortgage

Answer 3

• Variable-rate mortgage that follows (tracks) a stated interest-rate benchmark
• Base-rate tracker follows Bank of England (BOE) base rate for a specified period
• Rate changes automatically when the benchmark rate changes
• Provides transparency as rate movements are tied to official benchmarks

Question 4

Tracker mortgage considerations

Answer 4

• Product fee: One-time charge when setting up the mortgage
• Interest-rate floor: Minimum rate that applies even if benchmark falls lower
• Early repayment charge: Penalty for paying off mortgage during initial period
• Additional purchases required: Related products lender may require you to buy
• SVR increases: Risk of moving to higher standard variable rate after tracker period ends

Question 5

Fixed-rate mortgage

Answer 5

• Interest rate and monthly payments remain constant for an agreed period
• Typical fixed periods range from one to five years, sometimes up to ten years
• Provides payment certainty and protection against interest rate increases
• Usually reverts to lender’s standard variable rate after fixed period ends
• Only mortgage product that allows portability

Question 6

Capped-rate & collared mortgages

Answer 6

• Capped-rate: Variable mortgage that follows lender’s SVR but with maximum rate limit; borrower benefits from rate decreases while protected against excessive increases
• Interest-rate collar: Sets both maximum (cap) and minimum (floor) interest rates payable during term
• Provides partial flexibility of variable rates with added security against extreme rate movements
• Balance between variable rate benefits and fixed rate protection

Question 7

Flexible mortgage

Answer 7

• Features daily interest calculation allowing benefit from immediate overpayments
• Permits overpayments without penalty and underpayments if borrower’s circumstances warrant
• Overpayments typically held as credit balance rather than reducing mortgage principal; allows withdrawal of these funds when needed
• Allows payment holidays when needed and typically offers portability to another property

Question 8

Offset mortgage

Answer 8

• Links mortgage and savings accounts so they operate as a single financial arrangement
• Savings held in linked account are offset against mortgage balance, reducing interest paid
• Interest calculated only on the net balance (mortgage amount minus savings)
• Maintains access to savings while effectively earning tax-free returns at mortgage interest rate