The number of different mortgage types can often seem overwhelming. With such a wide variety of mortgage options available at the moment, it can sometimes feel difficult to choose which one suits you best. In this month’s article we break it down into simple terms, to help you understand which one might suit you best.
As with many choices in life, each option comes with potential pro’s and con’s, meaning that the suitability of certain options may come down you to your attitude to risk, and also available budget for monthly payments.
Your mortgage is generally taken out over a long period of time, and your interest rate, mortgage deal, and possibly lender, has the potential to change multiple times over the term of your mortgage.
This week, our columnist, lists an overview of the most common mortgage options:
Fixed rate mortgages
Fixed rate mortgages offer borrowers the comfort of knowing exactly how much their monthly payment is going to be for a fixed period of time. The most common fixed rate periods are 2,3, and 5 year fixed rates, although some lenders do offer longer term options.
This type of mortgage offers you protection against rate rises while in your fixed rate period. How long you fix for comes down to personal preference of potential long term peace of mind, or you may have the view that interest rates could potentially come down over the next 2 years. In that scenario you may wish to fix again on a lower rate.
There are so many variables that can impact the direction of fixed rate mortgages, and the best advice is to go with what feels right for you at the time.
If there’s any chance that you might need to move home during the fix rate period, check in advance of locking in your new deal that the mortgage is portable, and that you are able to borrow what you need to buy your new home if it is of a higher value.
Pros and cons of fixed rates
Pros
Certainty on your monthly payment costs for a minimum period of time.
No increase to payments for the whole of the fixed rate period.
Cons
If interest rates go down, you won’t see your payments go down.
If you want to pay your mortgage off early, there may be high penalties.
Tracker mortgages
With a tracker mortgage, the interest rate follows the Bank of England base rate. This means that if the Bank of England base rate increases by 0.25%, so does your mortgage. On the flip side, if it falls by 0.25%, so does your mortgage.
Generally Tracker deals last for a couple of years, although some lenders offer lifetime trackers.
Pros and cons of tracker mortgages
Pros
Interest rate changes are based on economic factors instead of commercial decisions by the lender. If the base rate comes down, so does your mortgage payment
Some lenders offer unlimited overpayments/no early repayment charges
Cons
If the base rate goes up, so does your mortgage.There is a level of uncertainty with this type of mortgage
Discounted rate/ variable rate mortgages
This type of mortgage usually sits at a discount off a lenders Standard Variable Rate (SVR).
The discounted period is usually for 2 -3 years, before you are moved onto the SVR.
Your mortgage payment/interest rate will move in line with the lenders SVR movements.
Pros and cons of discounted/variable rate mortgages
Pros
Less expensive than the lenders SVR
Often less expensive than a fixed rate mortgage
If interest rates come down, your interest rate will also likely come down
Cons
There is a level of uncertainty where your interest rate has the potential to go up
May be subject to early repayment charges should you want to switch mortgage deals before the end of the agreed term
Summary of Fixed rate mortgages vs Variable rate mortgages
Fixed rate mortgages give you peace of mind as to what your mortgage payments are going to be for a set period of time. Deciding how long to fix for can come down to personal choice and can also be influenced by what direction mortgage rates are moving in.
If affordability is tight, or you are buying your first home, you may benefit more from a fixed rate to allow you to budget more efficiently.
Tracker and Variable rate mortgages have the potential to offer more flexibility in relation to overpayments and low or no early repayment charges, as well as a low starting rate. If affordability is tight, then this option is potentially best avoided. This option may be more attractive to someone with a high level of disposable income, as they may view the potential reward of rates coming down is worth the risk of the rate potentially going up.
West End Mortgages are authorised and regulated by the Financial Conduct Authority. Your home may be repossessed if you do not keep up repayments on your mortgage.
Graeme Nichols is the Managing Director and mortgage specialist at West End Mortgages, an independent mortgage and insurance advice company, based in the West End of Glasgow, and working with clients across Glasgow, and throughout the rest of the UK.
