Mortgages can be a tricky thing to get your head around. To start with, which type of mortgage should you choose?
If you’re applying for a mortgage, it’s important you understand what each one is to help you choose the right finance for your needs. Read our simple guide to what’s available – you’ll soon be an expert.
A tracker mortgage works by ‘tracking’ the base rate. This is the UK’s central interest rate, which is set by the Bank of England.
If you sign up to a tracker mortgage then, depending on your particular deal, your interest rate will be set a couple of percent either above or below this base rate. If the base rate goes up, the interest you pay on your mortgage will too. And if rates go down, your monthly repayments will fall as well.
On a tracker mortgage, your repayments can change month by month. This means it may not be the best choice for you if you like to know exactly what goes out of your bank account.
However, if you feel confident in your money management skills, it could help you save money if interest rates fall. Just be aware that the Bank of England lowered the base rate to just 0.25% in July 2016, so if they go down again it’s unlikely to be by much.
A fixed-rate mortgage is just that – fixed. For the length of your deal, your monthly repayments will be exactly the same.
If the base rate goes down, as it did recently, your repayments will stay the same. This means you won’t benefit as you would if you were on a tracker mortgage.
However, if the base rate goes up, your repayments won’t, which they would with a tracker. With interest rates as low as they are right now, fixing is an attractive option because, while they can’t get much lower, if they do go up there’s no real way of predicting by how much.
Regardless of this, though, you may just prefer the stability of knowing exactly how much you have to pay towards your mortgage every month. With a fixed-rate mortgage, there are no surprises.
A standard variable rate (SVR) mortgage is the rate offered by your own lender. This is usually what you’ll switch to once your fixed or tracker deal comes to an end.
With an SVR, pretty much everything depends on your lender. If the base rate goes down, your monthly repayments might not – that’s up to whether your lender also cuts their rate. And it’s the same case if rates go up.
However, don’t expect your SVR to stay the same every month. As the name suggests, your monthly repayments will vary while you’re on this deal.
If your mortgage deal has come to an end and you’ve switched to your lender’s SVR, you don’t have to stay on it. Use a mortgage calculator like ours to work out what you can afford to pay each month and then shop around to see what deals are out there. You might stick with your lender but move to a new fixed or tracker deal, or you might opt to go with a new lender entirely.
We hope this blog has highlighted some of the key differences between the three main types of mortgage for you. Armed with your newfound knowledge, choosing which one’s right for you could be a lot easier!
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.