Topic 23: Interest- rate options

Question 1

What is Standard Variable rate (SVR)?

Answer 1

A mortgage where the interest rate is set by the lender and varies entirely at the lender’s discretion. The rate may be linked to the Bank of England base rate, but the lender has no obligation to take account of that rate.

Question 2

What is a Discounted-rate mortgage?

Answer 2

A variable-rate mortgage with a discount from the lender’s SVR for a stated period. It will increase and decrease in line with the SVR but will maintain the discount for the stated period. It is a genuine discount and is not added to the loan at any point, although early repayment charges may apply if the borrower pays off the discounted mortgage during the discount period.

Question 3

What is a Tracker mortgage?

Answer 3

A mortgage that tracks (or follows) a stated benchmark, usually the Bank of England base rate. The mortgage interest rate is usually set at a percentage above or below the base rate, and will change immediately every time the base rate changes.

Question 4

What is a Fixed-rate mortgage?

Answer 4

The rate of interest (and payments) is fixed for a stated term, typically two to five years. At the end of the fixed term, the mortgage reverts to the lender’s SVR unless another fixed term is arranged. Early repayment charges usually apply for the fixed-rate period.

Question 5

What is a Capped-rate mortgage?

Answer 5

There is a maximum interest rate (and payment) for a stated term. The interest rate will move up and down with the lender’s SVR, but will not exceed the cap during the term. At the end of the term, the mortgage reverts to the lender’s SVR unless another arrangement is made.

Question 6

What is a Collar?

Answer 6

The lowest interest rate that can be charged during the term of a capped-rate mortgage.

Question 7

What is an Offset mortgage?

Answer 7

Linked to a savings account with the same provider. No interest is paid on the savings, but capital in the savings account is deducted from the mortgage outstanding to calculate interest due each month. This will result in lower interest charges on the mortgage and, as the monthly repayments due are based on the full mortgage, there will be a potential overpayment each month to reduce the capital more quickly.

Question 8

What is a Base rate tracker?

Answer 8

A base‑rate tracker follows the Bank of England (BoE) base rate (Bank rate) for a
given period – typically up to five years, although some lenders offer lifetime trackers. During that period, the interest rate on the mortgage is set at a
percentage rate above or below the base rate. For example, a base‑rate tracker
set at 2 per cent above base rate will follow the base rate but will always be 2 per cent above it. A base‑rate tracker set at 1 per cent below base rate will follow the base rate but will be 1 per cent below it.

Question 9

How often to the Banks Monetary Policy Committee meet?

Answer 9

8

Question 10

What are the basic features of a flexible mortgage?

Answer 10

• daily interest calculation;
• the facility to make overpayments, within specified limits, at any time without incurring a penalty;
• the facility to underpay (lower than normal monthly payments) if the borrower’s circumstances warrant it;
• the facility to take a payment holiday, again if circumstances warrant it;
• the mortgage arrangement can be transferred to another property without
  penalties;
• most flexible mortgages offer an offset facility.