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If you live in the UK or are planning to move there, you should know that there are several home loan options available to you. Also, there are different types of interest rates with respect to these loans. The 3 most important types of rates are adjustable rates, fixed rates, and balloon rates. The Bank of England sets these rates. Currently, the lowest rate is 5%. So if you are looking to avail a home loan in UK, you must know about each type of interest rate and its advantages and disadvantages to be able to make an informed decision. So if you are interested in knowing about this topic, then please continue reading because in this article we are going to talk about just that.
1. What is an adjustable rate home loan?
As the name suggests, an adjustable rate home loan has an interest rate that is entirely dependent on the standard variable rate or SVR that can change depending on market conditions. Since the rate on this type of home loan adjusts itself as per the market fluctuations, there is a lot of scope for it to increase or decrease. You should also be aware of the interest rate and that an adjustable rate home loan has a much lower monthly payment initially. Since rates can change when they are adjustable, the borrower is forced to pay them no matter how much they increase. This will create an uncertainty which many people may not like and this is the reason why most people settle for choosing a fixed rate home loan which we are going to describe next.
2. What is Fixed Rate Home Loan?
These types of home loans are currently the most popular in the UK. Since the interest rates will be fully fixed, it will be easy for the borrower to estimate how much money they need to set aside every month to be able to pay the interest rate. In Fixed Rate Home Loans, the rates will not be affected by market fluctuations at all and will remain completely constant throughout the tenure of the loan. Surely you must be thinking that fixed interest rate home loans are a great option as they will not be affected if the rates rise in the market, but you must also know that one of the bad quality of them is that if the rates are not affected in the market The market has also declined, so at one point you may end up paying more than you would have if you had gone with an adjustable-rate mortgage. But the element of predictability is the main reason why most people choose this type of interest rate over an adjustable interest rate.
3. What are Balloon Rate Home Loans?
When it comes to this type of loan, a fixed amount will be loaned to the borrower and there is a fixed rate for it, after a certain period has elapsed, the rate will change. Payment plans usually come in two options, 7/23 and 5/25. This means that the borrower has either 5 or 7 years to pay off the entire loan at the fixed rate, or they have the option of repaying the loan at the new interest rate. So this means that the numbers 7 and 5 represent the number of years in which the loan will have a fixed interest rate and the numbers 23 and 25 represent the remaining loan repayment period. If you go with any of these options, the repayment tenure will be 30 years.
Now that you know about the different types of interest rates when it comes to taking loans in UK, you can go ahead and choose the one that best suits your needs. Just remember to think about your financial situation and read all the loan terms and policies before making any decisions.
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