There are two main types of mortgage, and these relate to the type of rate that is charged. The rates are known as fixed rates and variable rates. Read this guide from Curchod & Co for more information.
Fixed Rate Mortgages
The selling point of a fixed rate mortgage is that no matter what the Bank of England decides to do with its base rate, the fixed rate does not change within a specified period. The specified period will vary depending on what you negotiate with your mortgage lender, but some companies will lock in a fixed rate for up to a decade.
A borrower who signs up for a fixed rate knows precisely the amount their mortgage will cost during this period. There is no need to stress about an increase in mortgage payments if the interest rates around you rise while your rate is locked in, and this means there will be no impact on your budget.
However, there is a negative, and that is that fixed rate mortgages normally have repayment fees attached if you want to pay out early. So, if you did come into some money that you would like to use to repay your mortgage, it would cost a lot to do so. Ask your prospective lender how much extra you can put against your mortgage before a penalty is charged. There may still be some small flexibility of overpaying up to 10% of the amount owed.
Variable Rate Mortgages
A variable rate mortgage is one that can constantly change. This means that yes it can rise, but it can also fall too.
A discounted deal is when you are offered a rate that is lower than the standard variable rate being offered by the lender. A discounted deal can be offered because the lender chooses what their variable rate will be and has complete autonomy to do so.
However, a tracker mortgage is a mortgage that has a variable rate that changes in line with the base rate advertised by the Bank of England. Therefore, every time there is a change in the base rate, this variable rate will change too.
The positive of a variable rate is that it may start out lower than what is being offered for a fixed rate mortgage. However, there is no certainty that it will remain lower in the future.
So, who benefits most from a fixed rate mortgage?
If you need the certainty of knowing what your mortgage is going to be during a set period, then a fixed rate mortgage is for you. However, you must be aware that if the interest rates go down, you are still going to be locked into paying your set amount.
Buyers who are purchasing their first home often find a fixed rate suits them best while they get used to paying a regular home mortgage payment.
Who benefits from the variable rate option?
Because the Bank of England base rate is at an all-time low, people who are prepared to take the risk-benefit most from a variable rate, but fixed rates are more attractive to borrowers at present.
However, if you can find a variable rate that is lower than a fixed rate and you have faith it will remain low, then you will save money by signing into a variable rate mortgage. Just make sure that you can absorb the extra mortgage cost if the rate does rise in the future.
You will also find that as a general rule lifetime tracker mortgages do not incur fees if you choose to repay early, and you may want to have this flexibility.
While there is no crystal ball that will tell you what interest rates are going to do in the future, using this advice you should be able to choose the mortgage type that will suit you best.