How to Lock in your Mortgage Rate

There are a number of schemes that can be taken out to fix your mortgage rate.

a) Fixed rate schemes. These work by holding the interest rate at a stated rate for a given period, usually at the start of a mortgage loan. The longer the fixed rate term the higher the fixed interest rate. Fixed rates are usually offered at just above the prevailing variable rate. If rates are likely to fall during the fixed rate period, then the fixed rate mortgage is likely to be more expensive than variable rate mortgage loans. Conversely, if rates look set to rise, they are a cheaper option. In either case, the borrower knows exactly how much will need to be repaid each month. These mortgage products usually have a penalty clause so that if you move your mortgage during a predetermined period, you may have to pay a penalty.

b) Capped (and collared) schemes. Capped rate mortgages operate in exactly the same way as fixed rate mortgages except in one crucial respect. As in a fixed rate, the cap will determine the maximum sum that has to be paid each month, however, if interest rates fall below the value of the cap, mortgage payments will decrease. Collared mortgage loans (usually only available with a cap also) states the lowest value that will be repaid. If rates fall below the collar value, the collar value remains due. These are now very rare.

c) Tracker schemes. Although trackers do not fix a known amount to be repaid, they do fix a relative repayment value. The tracker rate is set as a value linked to an index and this relationship remains static, even when rates vary. An example would be a tracker rate set as 0.2% below the standard variable rate.