If you live in the UK or you’re planning to move there, you should know there are a lot of home loan options available for you. Also there are a lot of different types of interest rates regarding these loans. 3 of the most important types of rates are adjustable rates, fixed rates and balloon rates. The Bank of England is what decides these rates. At the moment, the lowest rate is 5%. So if you want to get a home loan in the UK, you should learn about each type of interest rate and it’s pros and cons to be able to make an informed decision. So if you’re interested to learn about this topic, please keep reading since in this article we’re going to talk about just that.
1. What is an adjustable rate home loan?
As the name says it all, an adjustable rate home loan has an interest rate which completely depends on the standard variable rate or SVR which can change based on market situations. Since the rate on this type of home loan adjusts itself to market fluctuations, it is very prone to increase or decrease. You should also know the interest rate and the monthly payments are quite low at the beginning time of an adjustable rate home loan. Since the rates may change when they are adjustable, the borrower is forced to pay them no matter how much they may increase. This will create a filling up unpredictability which a lot of people may not like and that is why most people settle for choosing a fixed rate home loan which we’re going to describe next.
2. What is a fixed rate home loan?
These types of home loans are the most popular in the UK at the moment. Since the interest rates will be completely fixed, the borrower will have an easy time predicting how much money they should put aside every month in order for them to be able to pay the interest rate. In a fixed rate home loan, the rates won’t be affected by market fluctuations at all and will remain completely fixed throughout the whole period of the loan. Of course you may be thinking fixed interest rate home loans are a great option since they won’t be affected if rates increase in the market, but you should also know that one bad quality of them is them not being affected if the rates in the market decrease as well, so at one point you may be paying more than you could if you went with an adjustable rate mortgage. But the element of predictability is the main reason which most people choose this type of interest rate over the adjustable one.
3. What are balloon rate home loans?
When it comes to this type of loan, a certain amount will be lent to the borrower and there is a certain rate for it, after a specific period of time has passed, the rate will change. Usually the payment plan will come in two options, the 7/23 and the 5/25. This means the borrower has either 5 or 7 years to pay the whole loan at the fixed rate, or they have an option to repay the loan at the new interest rate. So it means the numbers 7 and 5 show the number of years in which the loan will have a fixed interest rate and the numbers 23 and 25 show the rest of the loan repayment term. If you go with either of these options, the repayment period will be 30 years.