Mortgage holders are in line for further savings this week as it is widely expected that the European Central Bank rate will be cut to 1%.

If this rate does come into effect the average mortgage is expected to drop by €80 per month. It will be interesting to see if all mortgage lenders will pass on the full amount to their customer. At the start of this month First Active and Ulster Bank pass on only 0.25% of the 0.5% drop. If this happens again, we advise shopping around and remortgage with a different lender.

This is a question we get regularly from clients. Here is a simple explanation which I hope you find useful.

The Annual Percentage Rate (APR) on a mortgage is higher than the interest rate because the APR takes into account some of the costs that you pay when getting the mortgage loan. It is defined as “being the total cost of credit to the consumer expressed as an annual percentage of the amount of credit granted”

The purpose of an APR is to give you an indication of the real cost of your borrowings over the life of your loan so that comparisons can be more easily made. You see, sometimes you may be offered a special discount or an attractive start up rate for a fixed rate period at the beginning of your mortgage loan agreement and once the fixed period has expired the rates may increase. So the rate you pay at the outset doesn’t actually tell you the annual percentage interest rate that you may have to pay in the future.

Some people get confused about the difference between variable interest rates and fixed interest rates when applying for a Mortgage. They are not at all sure what an APR interest rate is all about. So below is a brief explanation of these:

Variable Rate Mortgage

With this type of loan the amount of interest that you must pay can increase and decrease. Changes in the variable rate are determined largely by base interest rates set by the European Central Bank (ECB). So, put simple if the ECB rate goes up your rate will increase swiftly afterwards, if the ECB rate reduces it will reduce, maybe not so swiftly though. You can overpay and redeem a variable rate mortgage without penalty, by doing this you can reduce the term of your Mortgage and the interest you pay.

Fixed Rate Mortgage

Are you looking for a mortgage where you will know what your repayments will be for a fixed period so that you can plan your budget? If so, then a fixed rate loan may be for you.

Fixed rate loans are those where the rates are fixed for a specific term with the result that your mortgage repayment remains constant for that term. For example, you can take your mortgage over a 20 year term and decide to get a fixed rate for the first 3 years of that term; thereby making it easier to plan for the future.

So, of course, the question is ‘What happens at the end of the fixed period?’ At the end of the fixed period you can choose between fixing your payments again for another specified period of time at whatever the new prevailing fixed rates are on offer, or you can switch to a variable rate repayment method.

If you opt for a fixed rate you commit yourself to paying this rate until the agreed period of time has expired. If you decide to pay your loan back early or wish to change to a different interest rate offer you will have to pay a fee (known as an early redemption fee) for terminating your fixed rate agreement. You should therefore only opt for a fixed rate if you are certain that you won’t be “breaking” the fixed term contract.

What Rate Should I Go For?

To determine what rate is suitable to you depends on your individuals circumstances. First time buyers might want the added security of a fixed rate for the first few years of the mortgage whilst a remortgage client who is comfortable with their current mortgage repayments would go for a variable rate in hope of further reductions to the ECB.

My advice is to speak to an impartial Mortgage advisor. At Mortgage Loans We cut out the jargon to make the decision easy for you.?