Types of Mortgages

Choosing the right type of mortgage is one of the most difficult decisions you will face. The options on offer can be confusing. Should you opt for a fixed rate mortgage to help you budget or would a tracker rate mortgage be the best deal?

Going directly to a lender or your own bank for mortgage advice will not always help you answer these questions. Not every lender offers every type of mortgage and they will only be able to discuss the particular mortgage schemes they have available. This is one of the many reasons why you should seek advice from a mortgage broker who can help you explore every avenue.

A fixed rate mortgage has an interest rate that stays the same for a set period. This could be anything from two to ten years. Your monthly mortgage repayments are the same every month and you don’t need to fear fluctuations in interest rates. The rate will remain the same over the specified period, no matter what happens to the Bank of England’s base rate or the lender’s standard variable rate (SVR). A fixed-rate mortgage usually lasts for two to five years, although longer options are available. Usually the longer the fixed period the higher the interest rate. At the end of the fixed-rate period the rate will usually revert to the lenders standard variable rate.

Advantages

  • Security of knowing how much you will pay for your monthly mortgage repayments.
  • This means you can budget other household costs more easily.
  • If interest rates go up, your monthly mortgage payments won’t.

Disadvantages

  • You would not benefit from any reductions in the Bank of England base rate or the lender’s standard variable rate.
  • Most lenders will charge you a penalty, known as the early repayment charge (ERC) if you need to get out of the deal before the end of the fixed term.
  • Fixed rate mortgages often have arrangement fees.

tracker rate mortgage is where the lender links the interest rate they charge you to an external variable rate (normally the Bank of England base rate), for a specified period. These mortgages will often give you an initially lower interest rate than fixed rates, but will rise and fall with any prevailing changes in interest rates. This means that your required monthly mortgage payments could go up or down. The Tracker rate period can be for a limited time of 2, 3 or 5 years before reverting to the lenders Standard Variable Rate, however, some lenders will offer trackers that last for the lifetime of the mortgage.

Typically, the lender charges an arrangement fee to pay to secure a tracker rate mortgage. However, in most cases these do not need to be paid upfront and some lenders will offer fee free options. The lowest tracker rate mortgage will often have the highest arrangement fee and it is therefore essential that you have an adviser calculate what is the most cost-effective option for you.

Advantages

  • If interest rates go down, so will your payments
  • Introductory tracker rates can be among the lowest variable interest rate you can get.
  • Introductory tracker rates can be less expensive for tracker mortgages in comparison to fixed rates.

Disadvantages

  • If interest rates go up, your payments will go up.
  • You might have to pay an early repayment charge if you switch before the end of a deal.

A standard variable rate mortgage (also known as SVR) is a type of variable rate mortgage. The SVR is a lenders default rate –  without any limited-term deals or discounts attached. When a fixed or tracker deal comes to an end, you will usually be transferred automatically on to your lenders SVR. A lender can raise or Lower its SVR at any time and, as a borrower, you have no control over what happens too it. The rate of interest charged on SVR mortgages can range from 2% – 6% or more. We will talk through your circumstances and explore the benefits of each type of mortgage with you. With your views, opinions and circumstances in mind, we can then make an impartial recommendation and go onto search the whole market to find the best mortgage rates for you.

A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME OR PROPERTY. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.

You may have to pay an early repayment charge to your existing lender if you remortgage.