One of the most difficult financial decisions during this period of economic turbulence is choosing the right type of mortgage. The tempting rates advertised on best-buy tables are generally available for a short period, after which the rate increases significantly. Therefore it is prudent to take a long-term view rather than focusing on the initial savings.
The most popular mortgage (or indeed, remortgage) types are fixed rate whereby, as the name would suggest, you agree to pay the same amount back each month over a set time period, and variable rate, where your rate will either depend on the Bank of England base rate or your lender's standard variable rate (SVR).
According to recent figures published by the Council of Mortgage Lenders, fixed rate mortgages currently account for 56 per cent of all new home loans in the UK, an increase from recent months that reflects the fact that many consumers are looking for stability in the economic downturn.
Fixed rate: The facts
A fixed rate mortgage will include a low introductory rate (typically 2-5 years) followed by a rise to the lender's standard variable rate. Although each lender's rate will usually be a little higher than the Bank of England's base rate, the lender is under no obligation to reflect changes to the base rate. There are fairly hefty penalties for moving to a different lender during the introductory period, which would negate any savings that you had made, so it is usually advisable to stay put at least for this time. However, after the initial introductory period has ended, the costs for moving lenders are minimal so astute borrowers can secure themselves a better deal every few years.
Variable rate: The facts
There are several types of variable rate mortgage; tracker and discounted. The former is a rate which is guaranteed to move in line with the UK base rate (set monthly by the Bank of England) and will usually be a few per cent higher than the base rate itself, and the latter is where a discount is applied to the lender?s standard variable rate for a set time period. Tracker mortgages will often specify a minimum rate (also known as a 'cap' or 'collar') to protect the lender from any extreme rate decreases (such as those in recent months). The existence of a mortgage collar should always be mentioned in your key facts document, but if there is any doubt at all, simply ask the lender.
The rate of a discounted mortgage will vary according to the SVR. Typically the discount will be offered for 2-5 years. As with the fixed rate mortgage, you need to be aware of the penalties involved in switching to another lender during this time.
Making your mortgage choice
The main consideration in the fixed rate vs. tracker rate debate is whether you are prepared to take a risk with your finances in order to secure a better deal. Those who need to know exactly how much is leaving their account each month will appreciate the stability offered by a fixed-rate mortgage, and will be prepared to pay a little extra for the privilege. Conversely, those who are prepared to take more of a chance by following the Bank of England base rate may well find that they can make significant savings. The fact that the base rate has decreased to the lowest levels in its history in recent months adds an extra dimension to the debate, as it is now widely accepted that interest rates will not continue to fall.There are some great deals to be found and Simply Finance can help you find them.
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