Looking to buy your first house? Or perhaps you are thinking of remortgaging your existing property? Either way, it’s important to get your head around the different types of mortgage products available to you.
Choosing a mortgage
Each type of mortgage product has benefits and disadvantages, depending on your unique situation. Selecting a mortgage with the best interest rate for you can save your family money in the long run, whilst giving you enough disposable income to enjoy life. The traditional means of choosing a mortgage was to visit a lender in person, who would take a look at your debt-to-income ration and other personal details to make you an offer. In the modern era, it’s possible to use comparison sites like Trussle to find the best mortgage deals. With such services, you can filter mortgage deals by rate type, spanning fixed and variable rate mortgages, as well as tracker and discount mortgages. Read on as we demystify the meaning of the most common mortgage rate types.
What is a fixed-rate mortgage?
When you sign up for a fixed-rate mortgage, you can get clarity on the interest rate of your mortgage for an agreed timeframe. Some lenders will offer two or three-year fixed-rate mortgages, while others will give you five or even ten-year fixed-rate mortgages.
The number-one benefit of a fixed-rate mortgage is the clarity of your repayments. You know that your interest rate will stay the same for a predetermined period, ensuring your repayments stay the same throughout this window. This is particularly helpful if you are on a tight budget and need that certainty for your disposable monthly income.
Bear in mind that you do pay a premium for choosing a fixed-rate mortgage to secure that certainty over your interest rate. Furthermore, if interest rates were to fall, your monthly repayments would not follow suit.
What is a variable rate mortgage?
At the other end of the spectrum, a variable rate mortgage is one where the monthly interest you pay on your mortgage can rise or fall in line with the Bank of England base rate. The most common variable mortgage is a standard rate variable (SVR) product, which sees you charged the standard interest rate set by your lender.
Although SVR mortgages usually follow the Bank of England base rate, it’s up to the lender to move their standard interest rate up or down. This makes SVR mortgages inherently risky and when the economic climate is such that interest rates are rock-bottom anyway, it may be more prudent to opt for a fixed rate product.
There are two more types of variable-rate mortgages that are typically offered by high-street and specialist lenders:
A tracker mortgage sees its interest rate pegged to the Bank of England base rate. It will be a predetermined percentage above the actual base rate, but it will move up and down in tandem with the base rate over time. The benefits are that your lender cannot choose to simply increase your interest rate on a whim. However, if the base rate rises so too will your repayments and it can be costly to switch mortgage products before your initial deal ends.
Some lenders will also choose to offer discounted variable mortgages at a lower interest rate than their SVR product. This discount will usually be active for a limited time period – usually between two and three years – before reverting to the SVR. Bear in mind that the discount is unlikely to be worth it if the lender’s original SVR is higher than most other lenders.
Ultimately, you must decide whether you prefer clarity with your monthly repayments or the flexibility to pay more or less as interest rates ebb and flow. As with most things in life, be sure to read the small print.