Fixed or Tracker mortgage?
Deciding on your mortgage is likely to be one of the biggest decisions that you’ll ever make, so ensuring that you choose the right one is imperative.
Repayment vs Interest-Only
Repayments are calculated in a way that means you will have repaid all the debt, including interest, over whatever term you agree.
This means that, when your mortgage begins, your outstanding debt is larger, so your monthly repayments end up paying the interest. As you continue paying, what you owe will reduce and means that your monthly repayments will gradually begin to pay off the actual debt.
What is an interest-only mortgage?
These sorts of mortgages were most popular for first-time buyers before 2008, and new laws introduced in 2014 mean that interest-only mortgages will only be offered to you when you have a viable plan to repay the capital.
As the name suggests, you only pay the interest on an interest-only mortgage. Your repayments don’t touch the actual debt, and after your term, you will still owe the full loan.
You then have to pay back the loan in one lump sum, and this is where many people struggle because they don’t have a plan for when their mortgage ends.
Unless you have an overpowering reason for going for an interest-only mortgage, then a repayment mortgage is where you should look.
They can be more expensive than interest-only, but you will owe nothing at the end and won’t face having to pay a huge lump sum.
What's a fixed rate mortgage?
A fixed rate is almost like an offer or incentive.
When you sign for a fixed rate mortgage, you will be on a rate that, regardless of what happens to interest rates, will not change whilst you’re on it.
The length of the time that you’re on the fixed rate for can vary from one to ten years, but all fixed rates have an end date and, when it does end, you will either need to remortgage onto another one if your situation allows or stick with the lender’s SVR.
Whilst you can benefit from fixed rates if interest rates rise, if they drop, then you will be unable to take advantage of a new, lower mortgage rate.
What is a variable rate mortgage?
On the other side of fixed rate mortgages, variable rate mortgages can move up and down in line with interest rates.
If interest rates go up, to discourage spending when the country is in a time of inflation, your mortgage payments will also go up in line with the new interest rates, and likewise if interest rates are dropped.
Variable rate mortgage fall into three sub-categories:
A tracker determines its rate by following an economic indicator, which is usually the Bank of England base rate.
These mortgages move in line with the indicator and are usually shown as, for example, 2.89% + base rate, as the base rate can change at any time. If the base rate increases by just 0.1%, so will yours.
Standard variable rate mortgages (SVR)
Every lender has an SVR that is up to them how they move. Again, it usually moves with the base rate but each one can vary.
This is generally the sort of rate that most borrowers end up on after an incentive period like a ‘two-year fix’ etc. However, because the rate lies in the hands of the lender, they can move it any time for any reason, so it can be risky.
Discount rate mortgages
A discount mortgage usually offers cuts to a lender’s SVR, most lasting for two to three years.
Can I go for a capped deal?
A capped deal is any sort of variable rate that has an upper limit, meaning it can’t exceed it regardless of what happens to any tracked rates.
The cap tends to be set quite high, and the starting rate is generally higher than normal variable and fixed rates.
You benefit from interest rate falls and have some protection from rises.
Can I just keep switching and remortgaging onto fixed rates?
You could, but you’d have to spend a lot of money on fees, so you should seriously consider before switching.
Two-year incentive periods are popular, but their fees can be expensive. If you were to have five separate two-year deals over a ten-year period, you will pay a fair amount each time.
But if you could get two five-year deals, you could save yourself money on fees, especially if you can’t afford to pay them upfront and have to add them to your mortgage debt.
If you manage to find a long-term fixed rate deal but there’s a possibility that you’re going to be moving within a couple of years, then you should consider your options as there will be early repayment charges, up to 5% of the loan, for either selling up or replacing the mortgage with another one.
For advice on deciding which mortgage you should go for, speak to one of our expert advisers who will be able to help you with the next steps.