The difference in mortgages explained

One of the big considerations to make when purchasing a house is what kind of mortgage you’ll get from a bank or building society. This will dictate how much you’ll pay each month, including loan interest, and how long you have to pay it off.
05-October-16
The difference in mortgages explained

There are three types of mortgage rates: fixed, variable, and tracker (which is a type of variable rate which we'll explain further below). Each of these has their own defining characteristics as well as advantages and disadvantages, which we will now explore.

Fixed Rate

As the name implies, a fixed rate mortgage is one where the interest rate is fixed for a defined period of time. Regardless of what the Bank of England sets its reference rate at, your interest repayments will stay the same.

Pros:

  • You are certain how much you’ll pay every month and can budget for this.
  • You’ll know when your fixed period will end and have time to plan if you wish to move to a different product when this period ends.
  • No matter how high interest rates climb during the fixed period, your monthly interest payments will stay consistent.

Cons:

  • You usually will have to pay an early redemption charge if you attempt to pay off the loan amount before the fixed rate period elapses.
  • If interest rates fall, you won’t benefit.

Variable Rate

A variable rate mortgage can be increased or decreased at any time by a financial institution at its discretion.

Pros:

  • On a standard variable rate product you are free to make lump sum payments or pay your mortgage back in full at any point without penalty.
  • If interest rates or the Bankof England Base Rate is cut, your mortgage rate may reduce also, which may mean it could cost you less than a fixed rate.

Cons:

  • There’s no certainty, as the interest rate is not directly linked to any reference rate.
  • You run the risk of being affected by lenders hiking rates, e.g. if bank base rate increases, you mortgage rate may increase too.
  • It could cost you more than a fixed rate mortgage would have over a fixed term if the rates increase.

Tracker Rate

A tracker is a type of variable rate mortgage where the interest rate directly 'tracks' another rate - commonly the 'Bank of England Base Rate', and often at a margin either above or below that rate.

Pros:

  • Your monthly mortgage interest payments will fall when the base rate falls..
  • There is the guarantee that you rate will only move based on economic change.
  • You may be able to secure a deal with no early redemption charge or the freedom to move to another deal.

Cons:

  • If interest rates rise, your mortgage repayments will increase.
  • Usually your rate is set a few percentage points above the base rate and is subject to the same jumps. This could mean a large jump in costs.

For any further information on these or any other types of mortgages give us a call and we can dicuss your requirements in more detail.

Source: Bottletop Media 05/10/2016

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