“I just wanted to write to you and thank you for your professional and efficient mortgage services which enabled me to purchase the above property. I was very impressed by the amount of work you put into making this an easy transaction for me, without this help, I would have found it extremely stressful and frustrating. You took all the hassle out of this process and for that, I thank you.”
Standard Variable Rate
All mortgage lenders set a Standard Variable Rate for their mortgages – a standard interest rate on their lending, which is usually set between 2 and 4 percent higher than the Bank of England base rate. This rate can vary from lender to lender, making comparison important to find the most attractive rate.
The main advantage of choosing a Standard Variable Rate mortgage is that there are usually no penalties for early repayment. This means you are free to switch lenders at any time without incurring any charges, although you will not take of advantage of the attractive lower introductory rates some lenders offer to new clients.
SVR offers another attraction in that if lenders choose to reduce their rate – such as if interest rates are cut – your monthly payments will decrease. However, the disadvantage of SVR is that if the rate is increased, your monthly payments will also rise.
A fixed rate mortgage is probably the easiest kind of mortgage to understand: it fixes your monthly repayment for an agreed period of time that can range from one year to the full term of the mortgage. Once this period ends your mortgage rate will be transferred to your lender’s Standard Variable Rate.
There are advantages and disadvantages to fixed rate mortgages: the security of paying a pre-determined sum every month allows for payment stability and peace-of-mind, but there are early repayment charges for leaving the mortgage before the fixed rate term has ended. The nature of the product means the customer is protected from higher payments if the lender’s SVR rises above the fixed interest rate, but cannot take advantage of lower payments if the lender’s SVR reduces below this rate.
The discount mortgage rate is a variation of the Standard Variable Rate mortgage, offering a discount from the lender’s SVR for a fixed period of time.
The discounted SVR rate fluctuates in parallel with the lender’s SVR rates, meaning that while the discount remains constant, monthly repayments can vary from month-to-month in line with changes to the lender’s SVR. Mortgage payments can therefore increase as well as decrease.
As with fixed rate mortgages, early repayment charges apply to this type of product if you wish to pay off the mortgage early or transfer to a new mortgage.
Capped Rate mortgages combine the advantages of variable and fixed rate deals. A limit – a ‘cap’ – is set with the lender on the maximum rate payable to be paid over a set period of time, while allowing the interest rate to decrease if the SVR drops during this period. This guarantees the maximum rate of interest a lender can charge – thus protecting against unexpectedly high monthly payments should the interest rate rise, while still taking advantage of savings made if a lender’s SVR decreases.
The trade-off for this flexibility is that the interest rates associated with a Capped Rate mortgage will normally be slightly higher than those of fixed rate mortgages. Early repayment charges also normally apply to these rates.
Base Rate Tracker
A Base Rate Tracker is an interest rate that ‘tracks’ the Bank of England’s base rate (BoEBR). The lender will offer an interest rate maintained at a consistent percentage above or below the BoEBR for an agreed period of time.
For example, if a lender offers a Two-Year Tracker rate at 2.00% above the BoEBR, and the BoEBR is 2.00%, then your initial interest rate will be 4.00%. If the Bank of England increases interest rates by 0.50%, then the 4.00% Base Tracker Rate will increase by the same amount to 4.50%. If the Bank of England decreases base interest rates by one percent, then the Tracker rate would decrease by the same single percentage amount from 4.00% to 3.00%.
As with SVR, Discounted and Capped mortgage products, Base Tracker payments are variable in nature and payments can therefore increase as well as decrease. Early repayment charges also normally apply to this type of rate.