Types of Mortgage Rates
Finding the right mortgage deal for you isn't easy. There are a few different types of mortgage, each with their own advantages and drawbacks. To help you get informed about what's on offer, this is our guide to the various types of mortgage available:
These are the most common types of mortgage. According to Which?, six out of 10 mortgage customers have a fixed-rate deal.
With this type of mortgage you pay the same interest rate for the entire deal, regardless of interest rate changes elsewhere.
The two most common lengths of deal are two and five years. In most cases you'll be moved on to your lender's standard variable rate when you reach the end of your fixed term. Most lenders will offer a follow on fixed rate and your mortgage adviser can help you with this nearer the time.
Whether a fixed-rate or variable-rate deal is best for you depends on a few factors. The most important things to consider are:
- Whether you think your income will change
- Whether you want to know exactly how much you'll pay each month
- Whether you could cope if your monthly payments went up
Variable Rate Mortgages
Variable rate means that the rate of interest you pay back on your mortgage is liable to change. Tracker mortgages and discount mortgages are the two main types of variable rate mortgages.
This kind of mortgage tracks the Bank of England's base rate. For instance, if the best rate was 0.1% and the additional rate 3%, you'd pay 3.1%. Typically, you take out this kind of mortgage as an introductory deal period - for instance, for the first two years - before being moved on to your lender's standard rate. There are a few mortgages with 'lifetime' trackers, but these are uncommon. In this case, your rate will track the Bank of England base rate for the whole mortgage term. Approximately 1 in 10 mortgage customers have a tracker mortgage according to research by Which?.
With this type of mortgage, you pay your lender's standard variable rate, with a fixed amount discounted. In case you didn't know, the term 'standard variable rate' refers to a rate chosen by your lender that doesn't change very often, with a fixed amount discounted.
If your lender's standard rate was 4% and your mortgage came with a 1% discount, you'd pay 3%. Sometimes discounted deals are 'stepped'. This would mean that you might take out a five year deal and pay a lower rate for a year and then a higher rate for the final four years.
Collars and Caps
What do jumpers and variable rates have in common? Well, they have a 'collar'. This 'collar' refers to a rate below which they can't fall, while others may be capped at a rate they can't go above. It's important that you pay attention to these features when choosing your deal. Not all variable rate deals have a collar. Collars and caps apply to tracker mortgages as well as variable rate mortgages.
Standard Variable Rate Mortgages
We mentioned standard variable rates earlier. Each lender can set this figure at whatever level it wants and it bears no relationship to the Bank of England base rate. Although they normally don't change often, lenders can change their standard variable rate at any time. Certain factors influence these changes - for example, they are more likely to change if there are rumours of the Bank of England changing the base rate in the near future.
Most people who have a standard variable mortgage have had their mortgages for over five years. However, your mortgage adviser should keep in touch at least once a year to ensure that you are getting the best mortgage rate for your personal circumstances.
An offset mortgage is where you have savings and a mortgage with the same lender and your cash savings are used to reduce the amount of mortgage interest you are charged. Rather than placing your money in a standard savings accounts, you place it in an offset account linked to your mortgage.
The bank offsets the total balances of your linked accounts against the amount you owe on the mortgage each month, and then works out your mortgage interest on the lowered balance. When you have an offset mortgage, you don't receive interest on the linked accounts. If you had a mortgage balance of £100,000 and offset £20,000 in savings, you will only be charged interest on £80,000.
We can help you!
Your home may be repossessed if you do not keep up repayments on your mortgage
Simmonds Mortgage Services is an appointed representative of Stonebridge Mortgage Solutions Ltd and can source the most appropriate cover from its panel of insurers with a free review of you overall protection and insurance needs. As with all insurance policies, conditions and exclusions will apply.