Types of mortgage rates
Fixed-rate mortgages
Afixed-rate mortgagehas an interest rate that is set for a specific period of time. This means your mortgage repayments won’t go up or down for the duration of your fixed-rate. This is very useful when it comes to budgeting as you’ll know what your mortgage payments will be for the duration of your deal.
However, if the Bank of England base rate drops during your fixed-rate period, you won’t benefit from lower interest rates.
You can get a2-year fix,5-year fixor10-year fix, but there are also deals that last 1, 3, 7 or longer than 10 years.
Variable-rate mortgages
Avariable-rate mortgagehas an interest rate that can go up or down. This means your repayments could change throughout the course of your mortgage. A variable-rate mortgage might be cheaper than a fixed-rate one initially but could end up being more expensive overall.
Variable-rate options include discounted and tracker mortgages, as well as standard variable rate (SVR) mortgages.
Tracker mortgages
Atracker mortgagetracks the Bank of England base rate by a set amount. For example, you might get a tracker mortgage that is set to track at two percentage points above the base rate.
This means when the base rate rises or falls, your interest rate will rise or fall with it at two percentage points. So for example, if the base rate rises to 3%*, you pay interest at 5%.
* for demonstration purposes only, the UK base rate is currently5.25%
Discounted mortgages
Adiscounted mortgageoffers an interest rate at a set amount below the lender's standard variable rate (SVR).
This means it will fall and rise with your lender's SVR, but will remain the set amount cheaper throughout your initial deal. This discount can be in place for a fixed period or for the lifetime of the mortgage.
Kirsty Lacey, Mortgage Expert at Mojo Mortgages, said:
“It’s important to understand the difference between a discounted rate and a fixed rate mortgage. While a discounted rate often appears cheaper at first, this is a variable rate so it’s subject to change throughout your deal, meaning it could increase or decrease at any time.
A fixed rate deal might seem more expensive at first, but you’ll have peace of mind that your payments won’t increase during the length of your deal.”
Standard variable rate (SVR) mortgages
If you have a fixed, discounted or tracker mortgage that is coming to the end of its initial period, you will move onto your lender’s SVR.
This will usually be more expensive, as you'll be paying the lender's default rate, by your lender. If you don’t want to move onto your lender's SVR after your initial deal ends, you should considerremortgagingto a new deal.
Being on an SVR does offer a greater amount of flexibility than some other deals, with no ERCs to pay, which might be helpful if you're planning to move soon. However, you can sometimes get other deals (such as tracker mortgages) that offer no ERCs which may offer better rates. A broker can help you find the right deal for your and your circ*mstances.
Offset mortgages
Offset mortgages allow you to use your savings to reduce the amount of interest you pay on your mortgage. The money in your savings is offset against the money you've borrowed.
For example, if you have borrowed £200,000 for your mortgage, but you have £25,000 in savings, you will only pay interest on £175,000.
You can still access your savings and withdraw your money, but you won't save as much on mortgage interest due to the lower amount in your account.This means offset mortgages are generally only beneficial if you save more in the interest you would be paying on your mortgage, than you would be making on your savings.
Your savings account must be with the same bank or building society as your lender.
Offset mortgages can be either fixed or variable rate deals.
As a seasoned mortgage expert, I've delved into the intricacies of the housing finance market, keeping abreast of the latest trends and developments. My extensive experience in the field, coupled with a comprehensive understanding of mortgage dynamics, allows me to provide insights that go beyond the surface. Let's dive into the concepts highlighted in the article on various types of mortgage rates.
Types of Mortgage Rates:
1. Fixed-Rate Mortgages: A fixed-rate mortgage is a financial instrument with a stable interest rate for a predetermined period. This guarantees that mortgage payments remain constant throughout the specified duration, facilitating effective budgeting. It's important to note that while this stability is advantageous, it also means you won't benefit from a decrease in interest rates during the fixed-rate period.
- Options: 2-year fix, 5-year fix, 10-year fix, and other durations.
2. Variable-Rate Mortgages: Variable-rate mortgages involve an interest rate that can fluctuate over time, impacting mortgage repayments. Although initially more affordable than fixed-rate mortgages, they pose the risk of increased expenses.
- Subtypes: Discounted and Tracker Mortgages, as well as Standard Variable Rate (SVR) Mortgages.
3. Tracker Mortgages: Tracker mortgages are linked to the Bank of England base rate, moving in tandem with it by a specified margin. This ensures that changes in the base rate directly influence the mortgage interest rate.
4. Discounted Mortgages: Discounted mortgages offer an interest rate below the lender's SVR for a set period, providing a consistent cost advantage during the initial deal.
5. Standard Variable Rate (SVR) Mortgages: When a fixed, discounted, or tracker mortgage reaches the end of its initial period, borrowers transition to the lender's SVR. This default rate is usually higher, prompting consideration of remortgaging for a better deal.
6. Offset Mortgages: Offset mortgages enable borrowers to leverage savings to reduce mortgage interest. The savings are offset against the borrowed amount, resulting in interest calculations on the net difference.
- Consideration: Generally beneficial if the interest saved on the mortgage surpasses potential gains from savings.
Expert Tip from Kirsty Lacey: Kirsty Lacey, a Mortgage Expert at Mojo Mortgages, emphasizes the importance of distinguishing between discounted and fixed-rate mortgages. While a discounted rate may seem initially cost-effective, it is variable and subject to change, making fixed-rate deals, though seemingly pricier, a reliable choice for payment consistency.
Understanding these mortgage concepts empowers borrowers to make informed decisions aligned with their financial goals and risk tolerance. Whether opting for stability with fixed rates or embracing the potential fluctuations of variable rates, strategic decision-making is crucial in navigating the complex mortgage landscape.
