Standard Variable Rate (SVR) Mortgage
With a SVR your monthly repayments rise and fall in line with changes in your lender’s standard variable rate of interest, not necessarily linked to the Bank of England base rate.
- Advantages – the lender does not usually charge for an arrangement fee. There are usually no penalties if you redeem the mortgage – often called early redemption penalties.
- Disadvantages – you have no certainty over monthly repayments. Initial monthly repayments will be more expensive than other options with an incentivised rate for an initial period.
Discounted Rate Mortgage
Your lender gives you a discount against its SVR for a set period of time. It will normally revert to SVR after the initial period.
- Advantages – repayments are lower than an SVR mortgage.
- Disadvantages – you have no certainty over monthly repayments. The lender will usually charge a one-off arrangement fee. There are usually early redemption penalties should you wish to redeem the mortgage during a period set by the lender.
Fixed Rate Mortgage
The interest rate is fixed by the lender for a set period. It will normally revert to SVR after the initial period.
- Advantages – your monthly repayments stay the same even when interest rates rise. You can budget knowing what your monthly repayments will be.
- Disadvantages – your monthly repayments will stay the same even if interest rates decrease. This means you will not benefit from a reduction in interest rates during your fixed period.
Base Rate Tracker Mortgage
During a set period the interest rate tracks the Bank of England’s base rate. The interest rate is expressed as base rate + x%. The monthly repayments change every time the Bank of England changes interest rates. Some are ‘Stepped Track- ers’ where the margin between base rate and SVR changes at the mortgage anniversary.
- Advantages – you benefit immediately from any reduction in interest rates by the Bank of England. Usually repayments are lower than an SVR mortgage.
- Disadvantages – you have no certainty over monthly repayments. You suffer immediately from any increase in interest rates. The lender will usually charge a one-off arrangement fee. There are early redemption penalties should you wish to redeem the mortgage during a period set by the lender.
Offset Mortgage
A similar idea to the current account mortgage but without a single account. Essentially, your mortgage debt is notionally reduced by the balance in your savings account; you pay interest on this notionally reduced debt.
- Advantages – you pay interest on a lower balance than with a traditional mortgage. You can usually overpay, underpay or take payment holidays as long as the debt is within your agreed borrowing limit. Your savings, effectively earn interest at the mortgage rate.
- Disadvantages – the lender will usually charge a one-off arrangement fee. The flexible repayment nature means you need self-discipline to ensure you repay the mortgage by the end of the term. If you are not a higher rate tax payer or have substantial savings, you may be better off with a more traditional option that has a lower interest rate. Also, other interest options sometimes allow overpayments and offer better rates.
Capped Rate Mortgage
The rate will not rise above a certain level for a set period.
- Advantages – offers similar security to the fixed rate. Initial rates are usually competitive.
- Disadvantages – the lender will usually charge a one-off arrangement fee. There are early redemption penalties should you wish to redeem the mortgage during a period set by the lender. Rates are often higher than a fixed rate, and caps are normally only two or three years.
Foreign Currency
A mortgage that is not in the same currency as your main income. This means it applies not only to properties abroad but also to UK properties.
- Advantages – if currency exchange rates move in your favour, then the value of your debt can decrease. This can impact it more than interest and repayments in the short term.
- Disadvantages – changes in the exchange rate may increase the Sterling equivalent of your debt and repayments, even if interest rates remain the same. Good practice suggests factoring in at least a 20% change in currency values.
