Which mortgage is best? There are a wide variety of mortgages, described below. Which is right for you depends on your circumstances and what is important to you. In comparing mortgages, it’s so important not just to look at the overall rate of interest and monthly repayment but also any fees or penalties which may be charged.
Fixed rate mortgages
The interest rate on the mortgage stays the same through the period for which the rate is fixed regardless of what happens to interest rates. The period over which the interest rate is fixed may vary and is likely to be in the 2-5 year range, after which the mortgage will revert to a variable rate. Always look at other mortgage deals towards the end of the fixed deal as otherwise the lenders variable rate mortgage may be more expensive.
The advantage of a fixed rate mortgage is that you know what your monthly payment will be for the length of the fixed period making budgeting easier. The disadvantages are that they are generally slightly costlier than variable rate deals and of course you won’t get the benefit of any interest rate falls. Be aware of any charges or penalties which may be applied if you want to leave the deal early – these can be expensive.
Variable rate mortgages
With variable rate mortgages, the interest rate can change at any time which can increase your monthly payments. Although interest rates have been stable for some time, be aware that a significant increase in interest rates could take a considerable amount of your monthly income so make sure you have sufficient cover or savings to cover this eventuality.
Variable rate mortgages come in various forms:
Standard variable rate (SVR)
This is the normal interest rate your lender charges on its mortgages. Interest rates rise and fall in line with the base rate of interest set by the Bank of England. It offers more freedom than a fixed rate mortgage as you can overpay or swap to another type of mortgage at any time.
The discount refers to a reduction on the lender’s standard variable rate. It is for a specific period of time, normally two or three years. It’s worth comparing rates amongst a wide range of mortgage lenders. There can be differences in the discount and the standard variable rates which the lender offers. The biggest discount doesn’t always lead to the best rate. There may also be charges if you want to leave the deal early.
Tracker mortgages move in line with another interest rate – normally the Bank of England’s base rate plus a few percent. If that rate goes up, the rate on the Tracker Mortgage goes up. They normally last for a short period of time, two to five years, but there are lenders who will offer longer periods of time.
Capped rate mortgages
The interest rate on a Capped Mortgage can move. It is still subject to an upper limit. This offers comfort if you are concerned about interest rate rises. Remember that the upper limit may be high in itself. The rate on a Capped Mortgage is often higher than other fixed and variable rates.
Offset mortgages work by charging interest on the net amount you have borrowed. This is the mortgage less the value of your savings. This means that you save as a savings interest rate is less than a mortgage interest rate. The monthly payment is maintained at the same level. The impact of an offset mortgage is that the mortgage is paid off earlier.