Introduction
The housing market in the United Kingdom has experienced something of a downturn in recent months, with the Royal Institution of Chartered Surveyors (RICS) reported a 32% drop in housing sales in March, April and May, 2008, compared to the same period in 2007. Housing prices fell by nearly 4%, year-on-year, to May, 2008; the largest fall since 1993. These figures should, however, be viewed in the context of housing prices rises of nearly 80% – £88,000, on average – in the five year period to August, 2007. Interest rates are currently low, employment levels are high, and few new homes are being built, all of which should help to support the property market.
Types of Mortgage Loan
In terms of interest rates, mortgage loans can basically be divided into "fixed rate", or "variable rate", deals, although the latter category contains a number of different mortgage products.
A fixed rate mortgage loan is one in which the interest rate is fixed – regardless of any change, up, or down, in the Bank of England base lending rate – for the term of the loan. This can be extremely useful, for first-time buyers, for example, since it offers the peace of mind of knowing exactly what monthly mortgage repayments will be for the entire term. A fixed rate mortgage loan is often chosen when interest rates are low, but expected to rise.
A variable rate mortgage loan, on the other hand, is one in which the interest rate changes – according the Bank of England base lending rate, or, more correctly, the SVR, or "Standard Variable Rate", of the mortgage lender in question – at predetermined intervals during the term of the loan.
This type of mortgage loan may include a "cap", which means repayments are linked to a base rate, but cannot go above a set level for a fixed period. This can be useful insofar as a borrower knows the maximum repayment that he, or she, will be required to make during that fixed period.
Another variation is a so-called "tracker" mortgage, which "tracks" a base rate at a set level above, or below, that rate for a similarly fixed period. This allows borrowers to benefit from a cut in interest rates, although they will obviously be required to pay more if interest rates rise.
On the whole, a variable rate mortgage deal is likely to be more expensive than a fixed rate deal, and there is no guarantee that a cut in the Bank of England base lending rate will, necessarily, be passed on to borrowers.
Mortgage Crunch
In the wake of the credit crunch, instigated by a crisis in the "sub prime", or "bad credit", mortgage sector in the United States, a mortgage crunch is underway in the United Kingdom, as mortgage lenders, finding it increasing difficult to borrow money themselves, pass the cost of borrowing on to the consumer. Families
choosing a flexible mortgage in Sussex, for example, are now faced with much more expensive interest rates, at the end of the fixed term.
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