With there being such a spectrum of products being available in the mortgage market I thought I would explain some of the most popular ones available.
Variable Rate Mortgages
Standard Variable Rate
Considered to be one of the most popular types of mortgage available, the interest charged on the loan varies throughout the term of the mortgage. The rate charged on the mortgage varies due to many influencing factors such as: competitor’s rate, Bank of England (BOE) base rate and general market forces.
The Standard Variable mortgage rate fluctuates with influencing factors; therefore these mortgages are not suitable for those who like to know what their fixed payments will be over a long period of time. Those borrowers in particular would opt for a fixed or capped mortgage product.
Put simply a tracker mortgage is a Standard Variable Rate mortgage that “tracks” an index. This is usually the form of the Bank of England (BOE) base rate or the London Interbank Offer Rate (LIBOR).
These mortgages are perfect for those who can afford to take a risk on monthly outgoings as while they may pay a higher rate when the base rate is increased, during times of low base rates they will benefit from savings made on the lower interest rate.
Fixed Rate Mortgages
A Fixed Rate mortgage mortgages] is a rate agreed between the customer and lending institution for a period of time “Fixed Rate Period” The fixed rate is perfect for those who like to know exactly how much money is coming out of their account each month for a known period of time, thus allowing them to keep a steady grip on their finances.
Most fixed rate mortgages require an arrangement fee so this must be taken into consideration of the true cost of the mortgage.
Prior committing to a fixed rate mortgage the borrower should consider future trends in interest rates, their household income and early repayment charges.
Capped / Collared Mortgages
By having a capped rate mortgage the interest rate charged is guaranteed not to rise above a contracted percentage during the fixed term period. The collared aspect applies the opposite; when rates drop the interest charged will not fall beneath a contracted percentage.
Variable Rate Mortgage Cost .Vs. Fixed Rate Mortgage Cost
There is no true way to say which of the two is the cheapest or most expensive as both carry their individual fees. It is truly down to the borrowers attitude to risk which will determine the true cost personally to them as a debt which they have carried over a long period of time.
Those who are risk adverse are best suited to the variable rate mortgage products as they are willing to take the highs with the lows as both can be very respectively beneficial or detrimental. Those who are not risk adverse and are more regimental with their outgoings a fixed product with the flexibility of overpayment’s would suit them very well.