Home Equity Release

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Getting your first mortgage can often be baffling, as there are hundreds of mortgages available. However, mortgages can be identified in five different groups, each with its own advantages. If you’re looking to get a mortgage, this guide can help you understand the different products.

Standard Variable Rate

This is the standard rate that a lender will give mortgages at and adjusts according to market conditions – it is often referred to as an SVR.

Fixed Rate

A fixed rate mortgage allows you to pay at a fixed rate of interest for a period of time, despite changes to interest rates in the market. Lenders typically offer fixed rates for two to five years, but it’s possible to find longer or shorter periods than this. At the end of the fixed rate term, you will normally go onto the lender’s standard variable rate.

Lenders often charge upfront fees for fixed rate mortgages through booking and arrangement fees, and they will often apply an early repayment charge, which deters borrowers from paying off their debt earlier. Sometimes, these early repayment charges can last longer than a fixed rate period.

Capped Rate

A capped rate is similar to a fixed rate mortgage, but if the standard variable rate falls below the capped rate, then the borrower will make repayments based on the lower rate. If the SVR rises, then the payments will be capped and won’t rise. A capped rate is normally better than a fixed rate if all other factors are the same. Up front charges and lock ins are also common.

Discounted Rate

This is when a lender offers a discount on their SVR for a period of time. For example, you might get a discount of 2% on whatever the SVR may be. It’s possible that the rate will go up or down, but the discount will still be active. One thing to look out for with discounted rates is ‘payment shock’ – for example you may get 3% lower than the SVR for one year, but forget to budget for the sudden jump in interest payments when the discounted rate expires.

Tracker Rate

This is similar to the SVR, but will be directly linked by a rate such as The Bank of England base rate (LIBOR) rather than the lender’s own rate. Currently this could be seen as very attractive, as the Bank of England’s base rate is currently under 1%.

Take a look at the Santander website for more information on mortgages.

HELOC stands for Home Equity Line of Credit. It is pronounced hee-lok, which is a lot quicker to say than home-equity-line-of-credit! So, what is it?

This is a fantastic summary of what a HELOC is, from Wikipedia. We couldn’t put it better ourselves!

“A HELOC differs from a conventional home equity loan in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card. HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years). Repayment is of the amount drawn plus interest. A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding). The full principal amount is due at the end of the draw period, either as a lump-sum balloon payment or according to a loan amortization schedule.

Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate. This means that the interest rate can change over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay.”

Read the article in full here.