There has been much discussion in the news lately about mortgages. Some banks have already increased some of their interest rates and with the Bank of England pushing the base rate to 5.25%, mortgage rates will continue to hit the headlines.
With talk about fixed rates, tracker mortgages and how these rises will affect mortgage payments we asked our independent advisors Caroline, Lyn and Vicky to explain each type of mortgage and the pros and cons so if you are near the end of your current deal you can see which is right for you.
Fixed Rate Mortgages
Fixed rate mortgages offer fixed monthly payments for a fixed time period. This is often 2 or 5 years, but some lenders are offering longer fixed deals due to the uncertainty in the market.
Caroline explains, ‘These are ideal for first time buyers and those who want the security of knowing their payments won’t increase allowing them to budget and plan ahead. Fixed rate deals are the most popular mortgage type with 75% of UK home owners choosing them - the key decision is how long to fix for and we can help you with that.”
Early repayment charges mean you’re charged if you use extra funds, such as savings or inheritance, to pay off significantly more (usually 10%) than your fixed mortgage asks for. This charge can also be applied if you move home, and switch deals or lenders.
If mortgage rates change significantly (up or down) whilst you are on your fixed deal then you may find you’re paying over the odds, as interest rates have decreased or you are hit with higher-than-expected payments when you switch to a new deal once this one has finished.
As the name suggests these mortgages ‘track’ the Bank of England base rate usually by adding on 1-2%. So if the base rate is 5% you pay 6 or 7% interest. If the base rate goes down so does your rate, but if it goes up, your payment does too.
Lyn explains,’ If you have flexibility in your household income, tracker mortgages are worth considering. If the base interest rate drops significantly, your monthly repayments for that period will fall, unlike with fixed rates. Many tracker mortgages also offer no early repayment charge, so you can over pay when circumstances allow and move your rate at any time, even to a completely new lender.‘
Tracker mortgages are much less predictable than a fixed rate mortgage and you may have many changes to your monthly payment across your mortgage term. There’s always the prospect of significant rate rises too so you need to look out for updates from your lender, and be prepared to budget around these changes.
Standard Variable Rate Mortgages (SVR)
This is your lender’s default mortgage rate, it rises and falls as they monitor the mortgage market.
Vicky explains, “This is the mortgage rate that your lender will move you to once your existing deal ends. If you regularly manage and review your mortgage deal, like you would your car insurance or energy supplier you will never pay the SVR of your mortgage lender, but there can be big increases if you miss remortgaging in time.”
The Pros and Cons…
These are very similar to tracker mortgages in the sense that your payments can go up and down and there are no penalties for over paying or switching mid-term.
There is one BIG difference though: Lenders have complete control over their SVRs, so they are usually much higher than fixed or tracker rates. They have to advise you when they are going up or down but they can go up higher than any Bank of England rate rise and don’t necessarily have to decrease if interest rates fall. They are therefore very unpredictable.
Some homeowners don’t know they are on their lender’s SVR or are worried that their finances wouldn’t allow them to remortgage - so they suffer in silence on these higher deals.
Independent mortgage advice
There are so many different mortgage types, interest rates, and length of mortgage term that it’s often difficult to determine which is right for your personal circumstances. Caroline, Lyn & Vicky have over 50 years of experience as independent mortgage advisors. They can weigh up the pros and cons of each mortgage deal to ensure you choose a product that gives you the security that you want at a monthly payment level you can afford.
Martin Lewis on the This Morning programme was highlighting today (27th June) the importance of speaking to an independent mortgage adviser 6 months before your fixed/ tracker rate finishes. They can then monitor the market and determine whether a better rate can be secured before your current deal ends.
This will avoid you from defaulting to the higher SVR interest rate and give you peace of mind that your next deal is ready to go, without the hassle of doing all the research yourself.
Our mortgage calculator
Poole Townsend can offer the best deals on the high street and from a range of online lenders. You can use our mortgage calculator to see the affordability of what’s available but we have many other options, such as changing the length of your mortgage term to help keep your payments down.
With the ever-changing mortgage market, there’s no better time to speak to our advisors about the current best deals and what to expect in the upcoming months. Contact us to book an appointment.