Choosing A Mortgage 24 Comments
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When it comes to choosing a mortgage, there are essentially two types to choose between: fixed rate, and variable rate. For great deals on fixed rate and variable rate mortgages, visit santander-products.co.uk.
With a fixed rate mortgage, the interest rate stays constant for a certain length of time, such as two, three, or five years. After the fixed rate period ends, you will move onto the lender’s standard variable rate. While a fixed rate does protect you against interest rate increases, if the interest rate drops then you could end up paying over the odds. They are best suited to people who need to budget carefully, or those who do not want to risk having their mortgage payments raised unexpectedly.
When a fixed rate mortgage switches to a variable rate, it may be a good idea to switch to a different mortgage provider, as the standard variable rate is rarely the best deal available at that time. Fixed rate mortgages tie you in for the length of the fixed rate period, so if you want to switch providers or pay off your mortgage during this time, you will have to pay an early redemption charge. This is why you may not want to be tied in for more than a few years, even though longer fixed rate periods are often available.
With a variable rate mortgage, the interest payments can rise or fall in line with changes to the Bank of England base rate. There are two basic types of variable rate mortgages: tracker and discount. With a tracker, the mortgage rate is set at a fixed margin to the base rate, so if you had a tracker that was pegged at 2% above the base rate, and the base rate was 0.7%, you would pay 2.7% interest.
With a discount mortgage, the rate you pay is linked to the lender’s standard variable rate (SVR). While these tend to follow the movements of the base rate, they do not have to. These types often start out cheaper, but if the base rate falls and the lender does not drop its SVR, then you might have been better off with a tracker.
The main advantage of a variable rate mortgage is that you can benefit if interest rates fall, rather than being tied into a higher rate for a certain length of time. However, if rates rise, they provide no protection against rising payments, which makes them more risky if you are on a tight budget. You can test this by using a mortgage calculator, such as the one available at the BBC website, and trying out various scenarios.