Whether you’re buying your first home or your current mortgage deal is coming to an end, it's important to know what mortgages are available to you.
Perhaps the easiest way to understand the different types of mortgage is to remember the clue is usually in the name.
In short, a fixed-rate means your repayment won’t go up or down for the term of the deal you sign up to; a Standard Variable Rate(SVR) is your lender’s own rate and can go up or down; and a tracker mortgage tracks the base rate set by the Bank of England so it too can go up or down. To find out more, read our guide:
A fixed-rate mortgage could suit those who don’t like the idea of risk and prefer to know exactly what they’ll be paying for the duration of their mortgage deal. You agree a monthly rate at the start of the mortgage and this is what you’ll pay each month. It doesn’t matter if interest rates change during this time; your monthly repayments will be the same.
This allows you to budget your finances accurately. You can get fixed-rate mortgages that last anywhere from two to ten years.
Of course, there is a downside to your mortgage payments being fixed and that is that if interest rates go down, you won’t get the benefit. However, the benefit of a fixed-rate mortgage isn’t necessarily about getting the cheapest deal - it’s about having the peace of mind that no matter what happens to interest rates, yours will stay the same.
Once the fixed term period ends, your mortgage will automatically switch to your lender’s Standard Variable Rate, which can be quite expensive. You can stick with this or shop around for a new mortgage deal.
A tracker mortgage tends to follow the Bank of England base rate, which is currently set at 0.5%. However, don’t make the mistake of thinking the rate you pay will be exactly the same as this. In reality, tracker mortgages are set a certain amount above or below the base rate, and this amount could be anything from 1% to 4% higher or lower than the base rate.
Let’s look at an example. Say the interest on your mortgage is set at 1% above the base rate at 0.5%, you’ll pay 1.5% interest. If the Bank of England decides to increase the rate by another 1%, your rate would also increase - to 2.5%.
There are different types of tracker mortgage available. The best rates usually come in the form of an introductory offer, but bear in mind these won’t last forever and you’ll need to review your mortgage when the offer ends or you’ll automatically switch to your lender’s SVR, which can be high.
There are long-term tracker mortgages available and even lifetime trackers, but these have less competitive rates.
Standard Variable Rate
Unlike a fixed-rate mortgage, a Standard Variable Rate is set by your lender. It’s rare you’ll start on an SVR, but your mortgage will switch to this when your current deal ends.
Unlike a fixed-rate, an SVR can change whenever your lender decides to change it. So effectively, your mortgage repayments could change month-on-month – although in reality this is rare.
Even if the base rate set by the Bank of England changes, your lender is not obliged to reflect this in the interest you pay. In other words, with an SVR you may miss out on one of the key advantages of a tracker – lower repayments if the base rate falls – and a fixed-rate – knowing exactly what you’ll pay each month.
One benefit of an SVR mortgage is that any arrangement fee (what you pay the lender to set up your mortgage), tends to be much less than it would be if you took out a fixed or tracker mortgage. In addition, because most borrowers will be switched to an SVR once their initial mortgage period ends, they won’t always face early repayment penalties. This means you may avoid penalties if you overpay or decide to remortgage.
Now that you are more familiar with the three main mortgage types, take some time to go over your options. All have their advantages and disadvantages, but ultimately only you can work out which best suits your needs.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.