You may think it’s a jungle out there and yes there are thousands upon thousands of products available, but with a little bit of guidance, you’ll get a better idea of a fit for you and your circumstances.
When choosing a mortgage, it’s important not to use the interest rate and the fees you’ll be charged as your deciding factor. You’ll need to think about the type of mortgage that best suits your needs and wants. We’ll take a look at the different types of mortgages on offer to give you an idea of what’s available.
Broadly speaking there are two main types of mortgage rates available, a Fixed Rate where the payments stay the same for a set period of time which would normally be between 2 and 5 years. Or a Variable Rate where your monthly payment can fluctuate in line with a change to the Bank of England rate.
The benefit of a fixed rate mortgage is that you will know your monthly financial commitment for a set amount of time, this will enable you to budget more easily. Because you are fixed in for a specific period (normally between 2 and 5 years) if the Bank of England rate does drop considerably you won’t benefit from it. One thing you should be aware of, is that if you do take a Fixed Rate mortgage, you are tied in for the length of the term (2-5 years) and if you want to leave the deal before the end of term, there will be charges to pay. These mortgages are usually portable, so if you take out a long fixed term mortgage and decide to move home part way through, you can (subject to valuations, payment of transfer fees and you meeting the financial criteria once again). You are also able to overpay these mortgages, usually by 10% of the outstanding balance every 12 months. Once the fixed term ends, you will automatically be moved onto the lenders variable rate, so it is advisable to look for a new mortgage product 2 -3 months before the end of your deal.
There are several sorts of variable rate mortgages available. The key thing to remember is, that with a variable rate mortgage your payment can change at any time. It’s important that you have a contingency or savings pot so that you can afford any rise in your mortgage payment.
A Standard Variable Rate (SVR) mortgage is the regular rate that a mortgage lender will charge. The rate can fluctuate with changes to the Bank of England base rate and will last for the entirety of your mortgage unless a new mortgage deal is taken out. The benefits to this type of mortgage are that you can overpay any amount or move to another product at any time. The disadvantages as mentioned above are that the rate can change at any time and the amount you pay monthly can increase (or decrease).
There is also a product called a Discount Mortgage, this is where a lender will give a you a discount off the standard variable rate (SVR), this discount deal runs for a specific amount of time and would generally last 2 or 3 years. It’s important to note that the biggest discount isn’t always the best deal as the standard variable rates that the discount is applied to may differ from lender to lender. Again, this type of product is subject to fluctuation so the benefit is that the standard variable rate might lower (your discount remains the same) so your payments will decrease. The downside is that the standard variable rate could increase (your discount remains the same) meaning that your payment could increase. Because this product is a deal, if you wanted to exit before the end of the term, there will be charges.
A Tracker Mortgages is similar to a Discount Mortgage in that if the interest rate changes your monthly payment changes. The Tracker Mortgage usually follows the Bank of England’s base rate so your deal could be Bank of England base rate +1% and that totals the total rate of interest that you will pay. So, if the Bank of England base rate increases by 0.25%, the interest rate you are charged on your mortgage will increase by 0.25%. These deals usually have a term of between 2 to 5 years, but there are some lenders out there who will offer longer term deals such as a Tracker Mortgage for the entirety of your mortgage. The advantages with this type of mortgage are that if the Bank of England base rate reduces, so will your mortgage payments, but equally, if the rate increases, so will your monthly mortgage payments. As with all mortgage deals, there are penalties if you want to change your mortgage deal before the end of the deal’s term. It’s important to check the details on these mortgages to check that the rates can only be increased when the Bank of England base rate changes.
A Capped Rate Mortgage follows the lender’s standard variable rate, but is capped at a certain level. The benefit is that you have the security of knowing that your rate will not increase above a stated level and if the standard variable rate (SVR) drops, your payment will reduce. It’s important that you could afford the level that the payments could rise to. The disadvantages are that the capped rate tends to be fairly high especially in comparison to variable and fixed rate mortgages. There is also the uncertainty of the rates being changed at any time up to the maximum (capped) level. These have been popular in the past, but have fallen out of favour with the lenders and are not available at present.
An Offset Mortgage can be a suitable product if you have savings. These mortgages connect your savings and current account and offset these amounts against your mortgage loan so that you only pay interest on what’s left over. You will pay a monthly mortgage payment to pay off the mortgage but the savings/current account funds act as a temporary overpayment.
It’s important to pick the product that works best for your circumstances both now and in the future.
