Do You Understand Your Mortgage?

Mortgages can be a complex business and it’s often rather difficult to get to grips with the different types on offer, and which one is right for you. If you’re looking for information on the various types of mortgages and how to choose one that works with your finances, here is a quick guide:

A fixed rate mortgage – the essence of a fixed rate mortgage is that the interest rate on the mortgage stays the same for a length of time (the ‘term’). The term of a fixed rate mortgage is usually between two and five years and within that time all the mortgage payments will be for the same amount. The main advantage of a fixed rate mortgage is that you know how much your mortgage payment is going to be each month and this can be great for peace of mind, as the payments won’t go up regardless of what happens to the Bank of England base rate. The down side is that if the base rate drops below your fixed rate then you won’t benefit by seeing your mortgage payment go down.
A fixed rate mortgage suits: those who are trying to plan their finances as well as those on a budget.

Tracker mortgage – the point of a tracker mortgage is that it ‘tracks’ the Bank of England base rate. The mortgage will track at a certain percentage either above or below the rate and can have as short a term as just one year. The advantage of a tracker mortgage is that it offers the opportunity to pay a very low mortgage rate, which frees up money to overpay whilst rates are low and shorten the overall length of the mortgage. If the rate only tracks the Bank of England’s base rate it also means that the mortgage is only influenced by the Bank of England base rate and not the mortgage lender’s standard variable rate, which can be much more changeable. However, there is less security with a tracker mortgage than a fixed rate mortgage, as the base rate can fluctuate, leaving you with substantially higher monthly repayments..

A tracker mortgage is good for: those with some financial flexibility who can take advantage of a lower interest rate to pay off a mortgage early. and can live with the risk of the potential of higher monthly payments should the rate go up.

A discount mortgage – this is another type of variable mortgage that tracks a lender’s standard variable rate, with a discount on that rate for a set period of time. This type of deal with last between two to five years on average and discounts are often around 1%. The advantage of this mortgage is that you know that your rate will never be higher than the lender’s standard variable rate, and when this is low that offers great deals. The disadvantage of this mortgage relates to its unpredictability, as it depends on the mortgage lender’s rate – watch out for the end of the mortgage term, when the discount ends and the rate can shoot up.

A discount mortgage suits: anyone who can commit to the term (there can be early repayment charges if not) and who doesn’t need the stability of a fixed-rate mortgage.

A standard variable rate mortgage – this type of mortgage is simply a mortgage that is linked to the lender’s standard variable rate, which is usually upwards of 2% above the Bank of England Base rate. This type of mortgage offers some great deals when the rates are low, but there is no guarantee that rates will stay low, which can result in considerable insecurity. A lender is also under no obligation to follow the Bank of England base rate, so even if this is cut, your lender may not follow suit and your rate could remain the same, or even rise.

A standard variable rate mortgage suits: those who are looking to take out a mortgage when standard variable rates are low, are happy with the risk that rates could go up at any time and can shop around to find the lowest rate.

Remember, if you are struggling to pay your current mortgage, it is best to seek help immediately. Please resist the urge to ignore your situation because your debts will rarely sort themselves out. We advise that you speak to your mortgage lender or your bank as soon as you anticipate problems to discuss what steps can be taken to help you manage your monthly payments.

If you are facing problems, and would like to speak to one of our advisors in confidence, please call Jemima Poppy today on 01908 232879.