Not only do you have to work out which mortgage will be the cheapest for you, which means looking at interest rates and fees, but there are also different types of product available.
So should you go for a fixed or variable rate deal? And what about offsets?
Here we explain the differences in order to help you work out which is the right type of mortgage for you.
The interest rate remains the same throughout the period of the deal – typically two to five years, though it is possible to get ten year fixed rates. If you opt for a fixed-rate, you’ll have the security of knowing exactly how much your mortgage will cost you for a set period of time.
Your mortgage payments will remain the same, even if interest rates changed. This makes it great for budgeting.
You are tied in for the length of the deal, so if interest rates fall you can’t take advantage of them. For example, if you opt for a five year fixed-rate deal, you will be tied in until the fixed term ends. If you want to get out of the mortgage before then, you’ll be charged a hefty penalty – often thousands of pounds.
So before you apply for a fixed rate mortgage, think about how long you are happy to be locked in for.
The interest rate on a tracker mortgage is usually linked to the Bank of England base rate. So if the base rate changes, your mortgage rate will change.
If the base rate was 0.50%, and you took a tracker mortgage with a rate that is 2% above the base rate you’d pay an interest rate of 2.50% . If the Bank of England put the base rate up to 1%, your mortgage rate would increase to 3%. This would add about £25 a month to the repayments on a £100,000 mortgage.
As with fixed rate mortgages, trackers are available over different terms: most commonly two or five years. With these deals, you’ll be charged a penalty if you want to get out of the mortgage during the term.
You can also get lifetime, or term, trackers and these are often completely penalty free so they are very flexible and can be a great option if you don’t want to be tied into your mortgage.
The rates on the leading tracker mortgages tend to be lower than on fixed rate deals.
Although trackers are variable rate mortgages, it’s easy to understand what rate you’ll be paying if they are directly linked to the base rate. Therefore, the rate, and your monthly payments, will only change if the Bank of England changes the base rate.
You don’t have the same security with a tracker that you get with a fixed mortgage because the rate is variable. This means you have to be prepared for the fact that your monthly repayments could go up – and it’s really important to make sure you’ll be able to still afford your mortgage if this happens. If money is tight and you need to budget carefully, a fixed rate mortgage will probably be a better option.
With an offset mortgage, your savings are linked to your mortgage. Instead of earning interest on your savings, the money is set against your mortgage. As a result, you pay less interest on that debt. For example, if you had a £150,000 mortgage and £40,000 in savings, you would only be charged interest on £110,000. This can work well for higher rate taxpayers, people who have savings but want to be able to draw on the savings if required and people who receive irregular incomes.
Trackers aren’t the only type of variable mortgage. Discounts are another. However, unlike trackers the interest rate isn’t linked to the Bank of England base rate. Instead, it’s linked to the lender’s standard variable rate (SVR) and this is a significant difference because lenders can change their SVR even if there has been no change in the base rate.
Discount mortgages are available over different terms – typically two to five years – and as with trackers and fixed rate deals you will probably be charged a penalty if you want to get out of the deal during the term.
These are mortgages designed specifically for those wanting to fund the build of their own home. They differ from a traditional mortgage in that funds are released gradually as your home is built, and increasing in value, usually to pre-agreed amounts. We can help you to plan at the outset to ensure that your cash flow is adequate to make sure you can finish the build, critical when building your own home.
There may be a fee for mortgage advice. The precise amount will depend on your circumstances and will be agreed with you before proceeding but we estimate this to be £599
