Here’s a quick explainer of three of the most common types of mortgage deals. Which one is best for you?
Searching for a good mortgage deal can sometimes feel overwhelming.
There are thousands of products to choose from, and lenders constantly review their ranges, so things can change quickly.
Just this month, lenders pulled hundreds of their cheapest deals amid concerns about geopolitical instability, and rising energy prices and inflation.
As a result, there has been a subtle shift in the market with interest in tracker mortgages increasing (we’ll explain why in a minute).
Santander says the number of customers choosing trackers has jumped from one in every 35 customers to one in 20.
While Moneyfactscompare.co.uk observes that some borrowers are finding variable deals – in particular base tracker rate deals without an early redemption penalty – the most appealing.
To help you choose the right product (and there is no one-size-fits-all answer, so always do your homework), let’s look at three types of mortgages.
Fixed rate
With a fixed-rate mortgage, you agree to pay a set interest rate for a certain period of time (typically two or five years). The benefit is you know exactly how much your monthly repayments will be (as this doesn’t change during the term). This makes budgeting easier.
If rates go up after you’ve signed the deal, you can feel rather smug – as the hike won’t affect you. Obviously, if rates drop, you won’t feel the benefit as you’re locked into a deal (and will pay a penalty if you leave early).
When the fixed-rate term ends, your lender will automatically bounce you onto its Standard Variable Rate (SVR). You can, of course, arrange a new deal with your current lender or remortgage with a different provider.
Standard Variable Rate
This is the default interest rate lenders charge on mortgages. Lenders set it and can change it at any time. For this reason, SVRs tend to be the priciest option.
However, crucially, you’re not locked into an SVR deal, so you can move when you want without penalty. This is why a lender’s SVR usually serves as a stopgap measure until you secure another deal.
Tracker
This is a type of SVR. However, lenders can’t just change the rate at a whim. The tracker follows the trajectory of the Bank of England’s base rate (although lenders always charge a set percentage on top).
If the Bank of England drops its rate, you feel the benefit immediately. (And when rates move in the other direction, you feel that too.) Most trackers operate on a fixed term of two or five years. Some, but not all, charge an early repayment fee if you want to exit early.
So why are trackers with no early fees popular with some customers right now? It comes down to two things. Firstly, at the moment, the tracker rate is often lower than a fixed-rate deal. Secondly, if there is a change in market sentiment, let’s say, hypothetically, the Iran conflict ends (hurrah), and the pressure on oil prices dissipates, the Bank of England may well drop rates.
Of course, we don’t know what will happen, so trackers do come with a degree of uncertainty. It’s a judgement call.
If you’re looking for a new home, one that better suits your work and life needs, contact us today so we can keep you posted on new and exciting listings.
