There are many different types of mortgages available on the market and choosing the right one can be daunting! Choosing the right type of mortgage is important; otherwise, you may end up in a position where you spend much more than you need to. Before deciding which mortgage to go for, read our guide on the different types available to see which works best for you.
According to UK Finance, three-quarters of Britain’s – which corresponds to 8.96 million mortgage borrowers – are on fixed deals. It is worth noting that those on a fixed-rate mortgage are not directly affected by base rate increases. This base rate is the rate that the Bank of England charges other banks and other lenders when they borrow money, and it’s recently risen to 1.25%. However, lenders will often provide deals that are proportionally higher than the base rate.
A fixed-rate deal is likely to be the most beneficial for first-time buyers and those looking for peace of mind during these financially uncertain times. Remember, if you break your agreement before it expires, you will be charged an early redemption fee. For example, if you exit a five-year fixed-rate deal in the first year, you’d pay a 4-5% penalty.
Standard Variable Rates (SVR)
After your fixed-rate deal ends, you automatically switch to a standard variable rate mortgage and stay on this rate as long as your mortgage lasts or until you remortgage onto another deal. The average rate for a SVR was 4.51% at the start of June, according to L&C Mortgages. Those on an SVR will be directly impacted by base rate changes.
With interest rates predicted to rise throughout the year, those on a standard variable rate mortgage may be looking to secure another agreement to ensure they’re not paying over the odds for their current deal.
SVR deals provide flexibility for homeowners as they can leave at any time. However, they are often not the most cost-effective as they give lenders the freedom to charge whatever they wish.
Tracker rates fluctuate in line with other interest rates – usually the Bank of England’s base rate – but tend to be set just above the base rate. They typically fluctuate more than a fixed rate, so if the base rate goes up by 0.5%, your rate will increase by the same amount. This deal often lasts around two to five years; however, some lenders offer trackers for the whole duration of your mortgage repayments or until you switch to another deal.
If you’re looking for more flexibility, you may choose a tracker deal. However, you would have less peace of mind than with a fixed-rate deal. You may also have to pay an early repayment charge if you want to switch your deal before it ends.
A discount-rate mortgage offers a discount on the lender’s standard variable rate for a set period of time, usually two to three years. Whilst the discount itself is set in stone, your repayments could go up or down if the lender’s rate changes. This is normally in line with the base rate but could vary.
For example, if the lender’s standard variable rate is 4% and the discount rate is 2.5%, your interest rate will be 1.5%. But if the standard variable rate goes up to 4.5%, your mortgage rate could increase to 2%.
What to have in mind when choosing a mortgage this year?
Homeowners are opting for variable or tracker mortgages, so they’re not locked into a deal in the off-chance that the interest rates go down later this year – although not likely. However, it is vital to plan ahead to avoid being automatically reverted to the lender’s full standard variable rate at the end of the deal – which could be very costly!
You should also consider the wealth of options available to you, as the market nowadays is much more consumer-led. Therefore, there are many deals available, meaning almost everyone has the opportunity to find a deal most suited to them.
Remember that most mortgage deals available differ based on peace of mind and flexibility. You must factor in the constraints around affordability amidst the cost-of-living crisis, as mortgage rates are most definitely set to climb in the coming months.
How do I find out what deals are on offer?
When you sign up to Moveable for free here, you’ll be given a personalised guide with everything you need to know about getting a mortgage. We’ll direct you to the best place to find mortgage deals, as well as a breakdown of all the key terms you need to know! Moveable will also help you stay organised, with tips on getting ready for that all-important application.