When you become a homeowner, chances are that your biggest monthly cost will be your mortgage. This will represent a significant outgoing, so it’s incredibly important that you choose a package that suits you.
To help you out, here’s a quick breakdown.
How Mortgages Work
A mortgage is a loan, awarded by either a bank or a body such as Saffron Building Society, to allow you to purchase a property. This money must be paid back over time, with a certain rate of interest added on to it.
Different mortgage types calculate this interest in different ways. Typically, the most financially advantageous mortgages will offer a special rate for an initial period, generally between two and five years. The type of mortgage will determine how this rate is calculated.
Standard Variable Rates
Standard variable rate (SVR) mortgages are one of the least popular types, and are generally chosen by those with little knowledge of the field. The amount of interest charged is roughly based on the Bank of England base rate, although they are not obliged to pass changes onto the borrower. Their repayments are typically uncompetitive when compared with other mortgage options.
Tracker mortgages function in a manner not dissimilar to variable rate mortgages, using the Bank of England base rate to calculate interest. However, although the latter uses this as an approximate measure to inform the rate they set, tracker mortgages adopt it fully.
An obvious boon, then, of tracker mortgages, is that any fall in the base rate will be passed on to borrowers. This means that whereas SVR lenders may decrease interest by 0.2 per cent when the central bank cuts it by 0.27, tracker mortgagees will feel the full benefit.
Conversely, of course, this is also one of their major disadvantages; if interest rates rise, your mortgage rate rises too. This means that those who saw their interest payments reduced to nothing in March 2009 (when the base rate fell), will inevitably see their mortgage repayments rise in the near future. As a result, you should look for deals with a cap on rises if you decide to choose a tracker mortgage.
For those who like certainty and have no room for manoeuvre when it comes to the amount they can afford to repay, a fixed-rate mortgage might be the best option.
Fixed-rate mortgage deals tend to run for between two and five years, with the promise that interest rates will not change during this period. Of course, there has to be a downside to knowing that rates won’t rise, and this comes in the form of higher initial fees, and penalties if you choose to leave the mortgage early.
When making your decision, it’s important that you really take the time to consider which of these options would work best for you. When the base rate is low, tracker mortgages can look terribly enticing, and if you have room for a little leeway when it comes to your monthly outgoings they can be a brilliant option. Equally, fixed-rate mortgages have many advantages, particularly for those working to a tight budget. In the end, the choice is simple; the right mortgage is the one that suits you.