When it comes to mortgages, there are so many different terms thrown about, it can sometimes become difficult to know what’s what! Standard Variable Rate, Fixed Rate, Tracker… You’ve most likely heard a few of those terms bandied about; but what do they all mean?
Fortunately, we’re here with this handy guide to fill in those looming gaps for you!
Fixed Rate Mortages: What is one?
A fixed rate mortgage, as the name would suggest, is a way of guaranteeing your mortgage payment for a set period of time! This period can be anything from as little as 1 year, to as much as 10 years. The great thing about a fixed rate mortgage is that, because the amount you’ll pay each month over this period of time will not change, it makes it great for budgeting and allows it to simply become one, uniform, regular outgoing from your account! The rest of your money is then yours to do with as you please!
Furthermore, if interest rates go up, you’ll still be safe on your fixed rate and won’t have to pay any more!
Your mortgage is likely to be your biggest outgoing every month, so having certainty that it will remain the same each month will allow you some much important financial stability!
So, what are the cons?
The down-side to all this financial stability and uniformity is that, if interest rates go down, you’ll still be left paying the higher rate. Fixed rate mortgages also often come with higher arrangement fees and, if you want to pay off your mortgage early, or re-mortgage during the fixed rate period, you may be faced with early repayment charges.
However, for some people, it’s worth the potential extra costs for the financial stability it brings.
According to Homesandproperty.co.uk, around 7 in 10 millenials opt for the “know where you stand” benefits of a fixed rate mortgage.
What is a “Standard Variable Rate” mortgage?
A Standard Variable Rate (SVR) mortgage is the type of mortgage you will normally drop on to when your fixed rate period with your lender comes to an end. As the name suggests, it is a type of variable rate. The rate is variable dependent on interest rates, but it ultimately determined by your lender.
There are benefits to an SVR: when interest rates are low, your payments may drop (the flip-side being that an increase could see your payments jump up as well). Arrangement fees will generally be lower than a fixed rate/tracker mortgage and there are usually no early repayment charges.
As this is generally the “bog standard” rate offered by your bank, it will likely be a less financially beneficial deal to you than that which you could attain from a fixed rate or tracker mortgage.
What is a “Tracker” mortgage?
A tracker mortgage is a type of variable rate mortgage. The difference between a tracker mortgage and other types of variable rate mortgage is that the tracker mortgage follows the movements of another rate. They will not match the rate but will track at a set percentage above the base rate. Ranges tend to be between around 1 and 3.5% above the base rate. So, if the base rate was at 0.5% on a 1% deal, then the rate paid would be at 1.5%. Tracker rates offer many of the same benefits as an SVR but with the added benefit of often being cheaper. It’s worth checking if the deal involves a “collar rate.” This is more frequently being introduced by banks. A collar rate caps how low your interest rate can fall, so if you hit this cap, your payments won’t fall any lower!
Other ones?
We’ve just listed the main mortgages types you may encounter here. There are ways to borrow; such as offset mortgages, which take the amount of money you have in savings and offset them against the loan, and bridging loans, which do differ from a mortgage slightly.
If you’re still uncertain about which type of loan would work best for you, Propillo have a wealth of in depth information, mortgage guides and rate calculators for the various kinds of mortgage available.