Different types of Mortgages
With a fixed rate mortgage, the interest rate stays the same for a set period of time. This means that for every month during this set period, your mortgage repayments will remain the same, even if there are changes with changes to the Bank of England base rate, or your lenders’ standard variable rate (SVR).The term of a fixed rate mortgage usually lasts between two to five years, but can be much longer. When this period comes to an end, your lender will typically transfer you automatically onto its SVR.
For more information on the pros and cons of fixed rate mortgages give our experts a call and they can advise on the best option for your circumstance.
A tracker mortgage is a type of variable rate mortgage. The interest rate usually tracks the Bank of England base rate at a set margin (for example, 1%) above or below it. Tracker mortgage deals can last for as little as one year, or as long as the total life of the loan. Once your tracker deal comes to an end, you’re likely to be automatically transferred on your lender’s standard variable rate (SVR). Typically, this will have a higher rate of interest.
For more information on the pros and cons of tracker mortgages give our experts a call and they can advise on the best option for your circumstance.
A ‘ lifetime tracker mortgage’ is a mortgage where the rate you pay back the loan at ‘tracks’ the bank of England base rate for the entire span of the mortgage, for example the base rate +1%. This is different to a typical tracker mortgage where the rate tracks the base rate for a set time period i.e. two years and then reverts back to the lender’s standard variable rate.
A discount mortgage is a type of variable rate mortgage. The term ‘discount’ is used because the interest rate is set at a certain ‘discount’ below the lender’s standard variable rate (SVR) for a set period of time. For example, if a lender has an SVR of 5% and the discount is 1%, the rate you’ll pay will be 4%. And if the SVR is raised to 6%, your discount rate will also rise – in this case to 5%.Discount mortgage deals typically last between two and five years. When your discount mortgage deal comes to an end, your lender will typically transfer you automatically onto its SVR.
For more information on the pros and cons of discount mortgages give our experts a call and they can advise on the best option for your circumstance.
A standard variable rate mortgage (also known as an SVR or reversion rate mortgage) is a type of variable rate mortgage. The SVR is a lender’s ‘default’ rate – without any limited-term deals or discounts attached.
When a fixed, tracker or discount mortgage deal comes to an end, you will usually be transferred automatically onto your lender’s SVR.
It can be risky to stay on your lender’s standard variable rate mortgage. A lender can raise or lower its SVR at any time – and as a borrower you have no control over what happens to it. Standard variable rates tend to be influenced by changes in the level of the Bank of England’s base rate. However, a lender may also decide to change its SVR while the base rate remains unchanged.
If you are on a tight budget and relying on your SVR to remain low, you’re in a very vulnerable position. In this case, it is very important you try to remortgage onto a fixed rate deal (which offers rate stability) before it’s too late.
For more information on the pros and cons of standard variable rate mortgages give our experts a call and they can advise on the best option for your circumstance.
Rather than trying to help people with their money needs, banks, building societies and other firms spend their time trying to sell you products. There’s often little thought put into what other products you may already have – the salesmen’s job is simply to pile another one on top.
Offset mortgages are a worthy attempt to address one consequence of that – the fact that people who have both cash savings and a large mortgage are not planning their finances in the most efficient way.
Savings rates compared to mortgage rates
This isn’t a difficult concept. Traditionally, most savings accounts have paid lower rates of interest than tended to be payable on mortgage borrowing (not surprisingly, since lenders use savings to lend to customers who need a mortgage). But if you’re earning less money on your savings than you’re paying out to service your mortgage interest costs, your overall wealth is effectively going backwards.
The simplest solution is to use your savings to pay a chunk off your mortgage – and to use all future surplus cash to pay down your home loan debt as quickly as possible. But that’s an option that doesn’t suit most people. They may have particular uses in mind for their savings – or, very sensibly, feel more comfortable with a rainy day fund on which to fall back in the event of an emergency.
Offset mortgages attempt to square that circle. They require you to pool your savings in one account with your mortgage debt. You can still draw down on the money when you need to, but in the meantime every penny of savings you have is used to reduce the total value of your outstanding mortgage – the sum on which your interest payments are calculated.
Over time, thanks to the benefits of compound interest, that can have substantial benefits, enabling you to pay off your mortgage in full much earlier than expected – and at a much lower total cost of borrowing than originally envisaged.
Offset mortgages are out of favour
Still, this approach doesn’t suit everyone. For one thing, it can prove complicated keeping track of your finances. While offset mortgage providers will ensure you get information on which pool of money is savings and which is mortgage debt, many people feel happier keeping them separate.
Also, in the current low interest rate environment, with base rates at all-time loans, the argument for the offset approach is not so clear cut. The difference between mortgage and savings rates is barely discernible.
There are also other things to consider when looking for the best mortgage deal. When thinking about which mortgage type would suit you the best you may find you would prefer a tracker, discount or fixed rate mortgage deal.