Variable Rate Mortgage
Is a swap Rate Mortgage right for you?
The first two considerations you have when arranging a mortgage is the type of mortgage rate is required together with how the mortgage will be repaid. The following article looks at the different mortgage rate options such as fixed rates, discounts, overhead, variable and tracker rates, together with the main advantages and disadvantages of each option.
When considering which type of mortgage product is suitable for your needs, it pays to consider your position the risk that people with a cautious attitude to risk may be a fixed or capped rate more appropriate, those with a more adventurous attitude to risk finding a tracker rate that fluctuates up and down more appealing.
Following is a description of the various mortgage rate options with a summary of the main advantages and disadvantages of each option.
Fixed Rate Mortgages
With a fixed rate mortgage you can lock into a fixed compensation costs will not fluctuate up or down with the development Bank of England base rate or the lenders standard variable rate. The most popular fixed rate mortgages is 2, 3 and 5 years fixed rate, but fixed rates of between 10 years and 30 years is now more common and affordable. As a rule of thumb is that the longer fasting period the higher the interest rate. This is true even when considering percent loan to value, borrowing less than 75% of the value of the property will attract a lower fixed rate over a 85% or 90% loan to value will attract a higher fixed rate.
Benefits
To have peace of mind that your mortgage payment will not increase with increases in base rate. This makes budgeting easier for fixed-rate period chosen, and may be advantageous to first time buyers or those stretching to the maximum affordable payment.
Disadvantages
The monthly payment will remain the same even when the economic situation looking the Bank of England and lenders reduce their base rates. In those circumstances where the fixed rate ends up costing more, remember why the original decision was taken to choose a fixed rate may be helpful.
Discount Rate Mortgages
With a discount rate mortgage, you are offered a percentage off the lenders standard variable rate (SVR). This takes the form of a reduction in the normal variable rate of say 1.5% for a year or two. The common mistake of those considering a discount rate has to assume a higher percentage discount, the better deal. The most important bit of information is missing, however, what the lenders SVR is because this will dictate the actual rate of pay after the discount applied.
As with a fixed rate, the longer discount period less a discount and the higher rate. Shorter periods such as 2 years will attract the highest levels of discount. Moreover, when considering the amount to be borrowed, the increased risk for the lender to give a 90% loan will be reflected in the rate of pay, with lower borrowing amounts attract more competitive prices.
Benefits
Should the lender their standard variable interest rate and your monthly payment will also reduce.
Disadvantages
When the lender or the Bank of England increased its base rate, your mortgage payment will also increase. But in some cases, lenders do not always disclose the full amount of a Bank of England base rate reduction.
Affordability of mortgages at the end of discount period should be considered at the outset. There is no guarantee that follow-up rates will be available and so you must make sure that you are able to make the monthly payment on the lenders standard variable applies to expired of the discount period. Allowing for an increase in the rate of SVR would be wise to avoid a 'Payment shock'.
Tracker Rate Mortgages
Tracker rate mortgages guaranteed to follow the Bank of England base rate when it moves up or down. Tracker rates are expressed as a percentage above or below the Bank of England base rate Such at +0.5% above the BOE base rate for 2 years.
The most popular tracker rate mortgages have been 2 and 3-year products, but there is now a growing demand for lifetime tracker rates as borrowers are beginning to realize that the Bank of England base rate has been reasonably competitive and have a mortgage product attached to it could be beneficial in the longer term.
Benefits
A tracker rate guarantees to follow the Bank of England base rate for how long tracker rate is set up. This means that once the Bank of England cuts rates, a tracker rate secured by real property to reflect the new lower rate and repayment.
The total cost calculation of a Lifetime tracker rate may be significantly lower than during shorter-term mortgage products with the ongoing costs of loan rescheduling, such as valuation fees, legal fees and lender arrangement fees. Lifetime tracker rates often have no prepayment penalty restrictions.
Disadvantages
The mortgage payment will go up if the Bank of England increases the base rate. Early repayment charges are expected to be applicable in benefit period, and as with other types of mortgage rate is expected to be 6 months interest, or 3% – 5% of the loan.
Variable rate mortgages
Mortgages with variable rate is more commonly known as the lenders standard variable rate (SVR), and the rate you get into after the expiry of a fixed, discounted, tracker or ceiling rate mortgage. A variable rate corresponds to a path rate as much as the lender will base their SVR at the Bank of England base rate plus a load of say between 2.5% and 3.5%. This is where the similarity ends, however.
Benefits
The biggest advantage of being on the lenders standard variable rate (SVR) is that there will be no early redemption charge for redemption of the loan in full. This provides some flexibility when there is uncertainty in the market about where rates are in motion. For those who wish to fix their mortgage rate, an SVR without early repayment charge can give it breathing space to just wait and see before committing.
While not always true lenders have a tendency to pass on reductions in the Bank of England base rate through their SVR, and saw them on SVR will benefit from a reduction in mortgage payment.
Disadvantages
Overall, the SVR will be a higher interest rate and so your mortgage payment will be greater than if you were on a tracker rate, fixed rate or discounted rate mortgage product. Moreover, as has been seen in the past, some lenders do not disclose any or all of a reduction in the Bank of England base rate, which results in a higher monthly performance compared to other loan options.
Reduced Rate Mortgages
The capped rate is a variable rate mortgage that has a fixed limit on how much the rate may increase (cap) and allows to know the maximum level of mortgage payments from the start. Reduced rate mortgages offer the best of both worlds for those with a cautious attitude to risk but still want to take advantage of lower interest rates. For example, if the cap is set at 6%, and banks rates go below this rate, then your repayments will go down to reflect the reduction of guarantees to rates go above 6%, your payments will continue to be based at the maximum 6% due to the CAP.
Benefits
If the Bank of England base rate falls resulting in a decrease in the lenders standard variable lower than the level of the reduced rate, then your monthly payment will decrease. For many it gives peace of mind and certainty in order to facilitate budgeting offered by a familiar monthly payment.
Disadvantages
Because a capped rate offers the best of both worlds to the borrower, the reduced rate is generally not competitive as lenders have to price in the risk of price reductions, leaving them as first time buyers or those stretching their affordability, are subject to a higher rate than would be available with a fixed rate. This means that UK lenders usually do not offer capped rate mortgage with any competitive price, but prefers to market fixed rates instead.
About the Author
For independent, impartial advice about Mortgage Rates and Equity Release Schemes contact Jerry Figueroa-Lee co-founder of The Mortgage Warehouse.