The Mortgage Dilemma
First time mortgage buyers and homeowners looking to remortgage their homes find the world of mortgaging very daunting. Finance lenders offer a variety of mortgage products that do different things like the Leeds Building Society. Homeowners often feel they should know what kind of interest rate deals they want when speaking to their lender about their remortgage requirements. So to reduce any confusion I have drawn up a quick mortgage guide to explain what each different interest rate product is and how they function.
All finance lenders charge their borrowers for providing them with an interest rate product . The price of these arrangements can vary from a couple of hundred pounds to a few thousand pounds depending on the product purchased, the amount of money borrowed and the duration of the product.
Unless you have a need for a short-term mortgage product then you should consider a longer term product. Always take financial advice and ask yourself the following question “who benefits more from my new mortgage arrangement?” In other words will the lender or broker make more money than you will save when you switch or change your mortgage product. The more often you change your mortgage product the more it will cost you and if you move lenders to get a great deal then beware of the other associated costs of moving your mortgage to another lender. It can cost you a few thousand pounds just to change lenders and you need to weigh this up with how much you are going to save.
Also consider how much extra it will cost you to arrange a new interest rate deal and decide whether the money you will be saving will be more than you will be paying for arranging your new interest rate deal. This might sound stupid but I have witnessed clients who have taken on a previous interest rate deal for a two year period and after paying the lender arrangement costs for the new interest rate deal and the solicitors costs it has taken them two years to repay the cost of arranging a that new lower deal. Everything that glitters is not gold. So “buyer beware” is my best advice and this is why I say look for longer term interest rate products. Any new mortgage arrangement should always be in your favour and not the broker or the lenders favour. But remember different horses for different courses which in the mortgage world means there is an interest rate for different circumstance and every mortgage owner has a different situation from the next homeowner.
The Six Main Types of Mortgage Products Available Today
Standard Variable Rate (SVR)Deal
This is by far one of the most expensive mortgage rates available and all lenders place their borrowers’ on this rate at the end of a deal until they decide to move to a new mortgage rate deal. The standard variable rate is typically set by the individual mortgage lenders at around 2% above the Bank of England’s base rate. The Bank of England’s base rate can move monthly depending on the decisions made at their monthly meetings on the economy.
Fixed Rate Deals
A fixed rate deal is possibly the most straight forward mortgage product available. The interest rate offered by a lender is fixed for the term of the deal arranged. A fixed rate deal provides the borrower with stability and a fixed monthly payment and no surprise increases for the term of the agreement. Your monthly payments will not increase for the duration of your agreement even if interest rate fall. Today lenders are offering fixed rate deals from 1 year to 5 years for around 5% per annum. Although prior to the collapse of the mortgage market in august 2007 there were lenders offering fixed rate deals up to thirty years.
A discounted interest rate is where the lender reduces the interest rate payable by say 1% or 1½ %off their Standard Variable Rate for a set period of time. At the end of the discounted deal the mortgage lender will move the mortgage borrower to their more expensive Standard Variable Rate which continues to follows the Bank of England’s monthly base rate moves. A discounted deal does not provide any stability for the borrower. The borrowers’ monthly payments can and do fluctuate as they move up and down according to the monthly changes made by the Bank of England. The discounted rate period is currently between 3 to 5 years.
A Tracker rate mortgage normally follows the Bank of England base rate. It is typical for lenders to offer a 0.25% or 1.25% rate above the Bank of England’s Base rate. A tracker rate deal follows the Bank of England base rate as it moves up and down. Tracker interest rate deals do not provide any stability in the borrowers’ monthly payments. A tracker rate is considered to be a better mortgage deal than a discounted rate which is set against the Bank of England’s base rate and not the banks higher standard variable interest rate. Tracker rate mortgages can normally be arranged for a period of 1 year to 5 years although some lenders have been known in the past to offer their tracker rate deals for the lifetime of the mortgage.
Capped Interest Rate Deals
A capped interest rate is a combination of a standard variable rate and a fixed rate mortgage. A Capped interest rate deal moves in-line with the Bank of England’s base rate but there is an upper limit or “cap” to protect you from the interest rate rising any higher than the cap that has been agreed. With a capped rate arrangement you benefit from a falling interest rates while protecting yourself from interest rate increases. A capped interest rate does comes at a cost with lenders arrangement fees being higher than a normal standard variable rate or a fixed rate mortgage.
An Offset mortgage allows you to link your savings account directly to your mortgage account. This is beneficial because it shelters any money in the offset account from taxation and uses the interest earned on savings to either reduce your monthly payment or repay the mortgage faster by reducing the term of your mortgage. Even a small savings balance can save thousands of pounds over the life of a mortgage.
The Term of the mortgage product
The term of a product will determine the interest rates that are available. For example five year products will have a lower interest rates than ten year product and vice versa. It depends on the lenders view of current interest rate movements and their views of future interest rates. The term of any mortgage deal will determine the interest rate that is offered. For example five year products may have lower interest rates than ten year mortgage products or vice versa depending on the lenders view of current interest rate movements.