DISCOUNT, FIXED, CAPPED OR TRACKER: WHICH MORTGAGE IS FOR YOU?

Bewildered by the options? Boggled by the language? Bewitched by the offers? You are not alone.

The mortgage market has thousands of products from hundreds of lenders, each with its own specific commitments, benefits and penalties. So how do you make the right choice to ensure you don’t get stuck with the wrong loan for years?

That’s the question asked by everyone we meet, and while nothing beats discussing your mortgage options with an advisor to work out what’s right for you, let’s take a look at the different interest rate types that lenders offer and the reasons for choosing one product over another.

FIXED RATE

If you want complete certainty over the amount of your mortgage payment for a while, a fixed-rate mortgage will give you exactly that. Once the loan is activated, your monthly repayments will stay the same for a set period, generally between one and five years, but occasionally for longer. Ten-year products have become more common and there are also ‘fixed for life’ mortgages available now. With uncertainty around the world, many people are locking in a rate for the long term.

However, fixed-rate mortgages come with a penalty for repaying any of the loan early before the fixed-rate period ends. They require a degree of certainty from you that you will either retain the property for that long or take the mortgage with you to your next purchase.

If your plan is for the home you are buying to be your forever home – perhaps to raise a family long-term – or you simply like the idea of payment security, then a fixed rate could well be a good option for you. To maintain some degree of flexibility, choose a fixed rate with a shorter term, perhaps two or three years.

CAPPED RATE

Capped rate mortgages are a type of variable rate mortgage, but with one important difference: they have an interest rate ceiling, or cap, beyond which your payments can’t rise.

For example, if the cap were set at 4%, that would be the highest you would pay no matter how high the lender’s Standard Variable Rate rose. And if interest rates dropped, your repayments would follow suit

A capped rate is normally only for an introductory period – typically anything from two to five years.

When the trajectory of interest rates is upwards, a capped rate can offer you the certainty that your payments will never go above a certain level. However, there are currently very few products available.

TRACKER & DISCOUNT RATES

Tracker rates

Many people found themselves in a positive financial position with their tracker mortgage when the Bank of England reduced its base rate to historically low levels. Some borrowers were lucky enough to end up paying zero interest, while some lenders changed their terms to ensure they weren’t left out of pocket.

The base rate is the interest rate that banks and lenders pay when they borrow from the Bank of England. It influences most interest rates, including savings accounts, credit cards, loans and mortgages.

A tracker rate follows the Bank of England base rate but is set either side (above or below) depending on whether interest rates are high or low. In times when lenders expect rates to rise, trackers will usually be lower than fixed rates, so may seem like an attractive option – just make sure you are comfortable with what may happen to your monthly payments if rates go up.

Tracker and discount rates are also often available without an early repayment charge, or with a much lower one than a fixed rate mortgage, meaning that if you expect to move home, or pay off a large part of your mortgage in the near future, they can be particularly attractive.

Discount rates

A discount rate mortgage works on the same principle as a tracker rate, but instead of following the Bank of England base rate, it follows your lender’s Standard Variable Rate (SVR).

You might find that the discount is a better initial offer than a tracker, but your mortgage rate will be led by your lender’s financial considerations, not by the Bank of England. Lenders have shown that they don’t always reduce their rates whenever the BoE base rate drops.

In theory, every time a lender takes a risk, it costs them, so, if you are comfortable with some uncertainty in your monthly payments, you may consider that over the course of the mortgage term, the average you will pay for a discounted rate will be lower than for a fixed rate.

VARIABLE RATE

A variable-rate mortgage changes in line with the lender’s Standard Variable Rate, often guided by the Bank of England’s base rate. So, whatever the ups and downs of interest rates – which are led by the economy – your mortgage will follow a similar course.

Does that mean constant uncertainty for the whole term of your loan? Not necessarily, because interest rates don’t tend to jump about wildly from month to month. Nonetheless, your rate could change at any moment.

So why would you consider a variable rate? Well, the key sell is lower upfront fees combined with increased flexibility.

Although your mortgage lender might not love your idea, if you only intended to keep a property for a very short time, or you simply weren’t sure of your future plans, a variable rate would let you sell up and pay back the entire amount with no early repayment penalty.

And if you ever wanted to switch to another product with the same or a different lender, you could change without incurring any fees.

A variable rate mortgage offers complete flexibility and is mainly only ever taken when you know you won’t be having the mortgage for very long (whatever the reason).

FINAL WORDS

Although we’ve explained the differences between the types of mortgage interest rates and why you might choose one over another, not every product in any category is right or available for everyone.

Lenders all have their peculiar criteria over who they prefer as borrowers, so why not book an appointment to chat about your plans with one of our advisers? We can help you identify exactly the right mortgage product that offers whatever certainty or flexibility you need.

Call us on 0117 4039430 or email hello@wrethical.com to fix a time.

Your home may be repossessed if you do not keep up repayments on your mortgage