When it comes to mortgages and deciding which type is right for you it can feel a bit overwhelming, which is the safest, which is the cheapest? The best thing to do here is speak to a mortgage adviser who can talk you through the pros and cons of each mortgage and how they will suit your situation, but here is a brief outline of the different products you are likely to see.
Fixed rate mortgages are considered lower risk as the rate you apply for and are accepted on, isn’t going to change for the initial term agreed on. This makes it easy to budget for that initial term of normally 2,3,5 or 10 years as you know the rate isn’t going to change and your payments are going to remain the same. It is important to make a note of the end date for the initial rate, as following this you will go onto the lenders standard variable rate which could be vastly different from what you have been on and have budgeted for. It is normally recommended to look to remortgage before this point and a mortgage adviser can talk you through this. Plan to start looking around 3 months before the end of your initial rate.
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Tracker mortgages are more of a medium risk mortgage as the rate can fluctuate from one month to another. With a tracker, you are taking the risk that one month the rate may increase meaning your payments will also increase, however, the opposite could happen. As we have seen throughout recent years, rates have been dropping meaning those on trackers will have seen their payments coming down. This is because the product is tracking another rate, usually the Bank of England’s base rate. As that has moved, those people on tracker mortgages have enjoyed lower payments as the base rate has continued to drop.
Discount mortgages are where a lender offers a discount on their Standard Variable Rate. This means they could be seen as slightly riskier than the tracker mortgage as changes in the rate can be more unpredictable. The benefit of a discount rate is that you can see some of the cheapest rates on the market but can result in payments ending up much higher than when the mortgage started if the lenders Standard Variable Rate increases over the initial tie in period.
Standard Variable Rate
Standard Variable Rate usually has the highest interest rate out of all of these products but for good reason. With a Standard Variable Rate Mortgage, you have no tie in period meaning if you decide to pay off your mortgage you have no early repayment charge to move from that lender, whereas with the other products you will normally have an early repayment charge that lasts until the end of the initial term you have entered into. These mortgages may be seen as the highest risk because the rate can fluctuate on a monthly basis if the lender is deciding to change their rate.
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Offset mortgages can be good for those with large savings but sometimes need access to that pot of money. With an Offset mortgage, you place an amount of money in a side account with your mortgage lender. The money in the account is used to offset what you would normally owe, therefore, the lender will not charge you interest on that portion of the loan. To give an example, if you had a mortgage of £100,000 on an offset mortgage but had £50,000 in the lenders side account, instead of being charged interest on £100,000 you will only be charged interest on £50,000 which can save you money while still allowing you access to the £50,000 should you need it. These accounts normally appeal to the self-employed who might, business dependant, need to draw funds at any given time
If you have any further questions on types of rates please feel free to give us a call and we can try to help answer your query.