As a homeowner, it’s important to know the different mortgage types available to you so that you can make the best decision for your individual situation. We’ll explore the different mortgage types, their pros and cons, and what to consider when choosing the right mortgage for you.
When deciding what mortgage type is right for you, there are a few key points to keep in mind. Consider your current financial situation and how much you can afford to pay each month, keep in mind the interest rate and terms of the mortgage, as well as any fees that may apply. We’re providing this information as a guide, it’s also important to work with a expert mortgage broker who can help you find the right deal for your needs.
Fixed-rate mortgages
A fixed-rate mortgage is a mortgage where the interest rate stays the same for an amount of time. This can help you know how much your monthly payments will be. But it is important to know that most fixed-rate mortgages have an introductory period (period with a redemption penalty). After that, the interest rate changes to the lender’s standard variable rate (SVR). If you think interest rates might go up, a fixed-rate mortgage could be a good option.
Pros:
- You can budget knowing exactly how much your mortgage repayments will be each month
- The interest rate won’t increase even if market rates rise during the mortgage term
Cons:
- If market rates fall, you won’t benefit from lower monthly payments Once the introductory period ends, you may have to pay a higher interest rate than you would with a variable mortgage
- You will need to remortgage after the initial term if you want the certainty of further fixed payments or you will move onto SVR
Standard-variable-rate (SVR) mortgages
As we mentioned before, each lender has its own SVR, or standard variable rate. This is the rate the lender can charge for a mortgage, and it is usually much higher than other types of mortgages, like fixed-rate, tracker, or discount mortgages. The SVR doesn’t change very often, but it can be affected by changes in the base interest rate. So if you have an SVR mortgage and interest rates go down, your monthly payments could go down too.
For example, if the base rate goes up by 0.25%, lenders don’t have to increase their SVR by the same margin, but many will.
Pros:
- Your mortgage payments could go down if interest rates fall
- You might not have to pay an early repayment fee if you want to switch to a different mortgage deal
Cons:
- Your mortgage payments could go up if interest rates rise
- You’re at the mercy of your lender when it comes to changing your mortgage rate
Tracker mortgages
A tracker mortgage is a mortgage where the interest rate is linked to an external reference rate, usually the Bank of England’s base rate. This type of mortgage can offer some protection against rising interest rates. It’s important to note that although tracker mortgages follow the base rate they will do so with margin, which is an additional percentage added to the base rate.
For example, if the interest rate on your tracker mortgage is set at the Bank of England’s Base Rate plus 2%. So, if the Base Rate is currently 2.25%, you will be paying 4.25% interest on your mortgage. If the Base Rate changes to 4%, then your mortgage interest will go up to 6%.
Pros:
- Will save money against the lenders standard variable rate
- Your mortgage payments could fall if the Bank of England’s base rate decreases
Cons:
- Your mortgage payments could increase if the Bank of England’s base rate increases
- Not all tracker mortgages follow the Bank of England’s base rate, so it’s important to check with your lender to see how your mortgage will be affected by changes in the base rate.
Discount mortgages
Discount mortgages are deals where you pay a lower interest rate than the lender’s standard variable rate. This means that if the lender’s standard variable rate goes up during this time, your payments will also go up. But if the standard variable rate goes down, you will pay less. After the introductory period ends, the mortgage will go back to charging the lender’s standard variable rate. Discount mortgages can be a good option if you think that interest rates will stay low during the introductory period. But keep in mind that your payments could increase a lot if rates go up.
For example, if the standard variable rate is 6% and your deal has a 2% discount, you would pay 4%.
Pros:
- Your mortgage payments could decrease if your lender’s SVR decreases
- Your payments will be lower than if you were on the lenders SVR
Cons:
- Your mortgage payments could increase if your lender’s SVR increases
- If you want to switch to another mortgage deal before the end of the deal period, you may have to pay an early repayment fee
Now that you know a little more about the different types of mortgages available, you can start to narrow down which one might be the best fit for your individual situation. If you have any questions or want to learn more about getting a mortgage, our team is always happy to help. Give us a call today and we’ll walk you through the process.
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