You can have an interest rate which is fixed for a specified number of years, or you can have a rate which is variable and can change as often as monthly…
The rate that suits you best is a personal choice and its worth taking the time to consider each option to make sure you fully appreciate the small print and the restrictions to the deal you are signing up to. The most common options are:
Fixed Rate
This does what it says on the tin! In this case the interest rate is fixed at the outset of the mortgage and will not change for a specified period of time. A really good idea for people who are on a tight budget or where the idea of a variable rate makes them nervous.
The most common fixed rate periods are 2, 3 and 5 years. After the fixed rate has expired you will have to select (and pay a fee for) a new rate so do bear that in mind when making your initial selection.
During the fixed rate you will be penalised if you need to ‘break’ the rate but some lenders will allow you to pay small one-off amounts into the mortgage. If you move house you will generally be allowed to move the mortgage with you which is called ‘porting’ the rate.
Tracker Rate
This is a variable rate mortgage where your interest rate will be linked directly to the Bank of England Base Rate. The Base Rate is reviewed monthly and CAN change every month if the Committee setting rates thinks that it is appropriate to do so. A Tracker rate might be a good idea for borrowers who want the most flexible mortgage, potentially allowing them to make irregular additional capital payments, or where they are confident that interest rates will stay low.
In recent years most lenders have introduced time restrictions to their Tracker rates so you may find that the rate only lasts 3 or 5 years in a similar way to a fixed rate. You may therefore find yourself having to select (and pay for) a new deal. If you think a Tracker rate will suit you we generally recommend looking for one without an expiry date even if it is slightly more expensive in the short term.
Discount Rate
This is also a variable rate but in this case the rate is calculated as a discount to the particular lender’s Standard variable rate. The timing of rate changes is therefore at the discretion of the lender rather than the Bank of England. Discount rates are usually short term deals, perhaps suitable for applications who need the lowest possible mortgage payment in the first couple of years of the mortgage when things are generally more expensive.
You will usually incur a penalty is you repay additional money or exit the deal early.
Standard variable rate
As a default position all lenders will have a Standard variable rate. This is the default rate for mortgage holders who have not selected a specific product. It is generally the most flexible mortgage on offer form the lender, but therefore usually the most expensive.
To find out more email info@decarteretwealth.com or telephone 01534 860660.
