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What’s the difference between fixed rates and variable rate mortgages? 

Fixed Rate Mortgages

A fixed rate is where your mortgage interest rate is guaranteed to stay the same for a set period of time. It’s one of the most popular interest rates across the mortgage market because people like to know what their payments are going to be every month.

When you take out a mortgage, you typically have an introductory rate that would last for a set period of time. This fixed rate can be between two and fifteen years. When the fixed rate period ends, you’re usually moved onto the lender’s standard variable rate, which is the default rate.

The lender’s variable rate is known as SVR or standard variable rate. A variable rate will go up and down as the market fluctuates, and the lender has control over that rate. Most lenders will keep interest rates in line with the Bank of England base rate.

As standard variable rates are normally a lot higher than fixed interest rates, most people will choose to remortgage when they are moved onto the lenders SVR.

Variable Rate Mortgages

Some lenders give you the option of taking the standard variable rate from the beginning of your mortgage. This is not very common and there are only a few specialist lenders that offer that option.

Tracker Rate Mortgages

A tracker rate mortgage has a variable rate, so it has the possibility of fluctuating up or down. The difference between a tracker rate and a standard variable rate is that the tracker rate specifically tracks the Bank of England’s base rate. This means that the lender has no control over rate changes.

The interest rate for a tracker mortgage is usually the UK base rate, plus a certain percentage. If the base rate was to decrease, your rate would go down and if it was to increase, your rate would go up. It’s often more flexible than a fixed rate mortgage, in that it doesn’t usually have early repayment or penalty charges, should you choose to pay your mortgage off early.

Discounted Rate Mortgage

A discount rate is actually very similar to a tracker rate. Instead of following the UK base rate, however, you are offered a discount off the lenders standard variable rate. So for example, if the standard variable rate for a lender is five percent and they offer you a discount of three percent, your payable rate is two percent.

Similarly to a fixed rate, the discount would be for a defined introductory period. Once that discount period is over, you transition onto the normal standard variable rate for that lender. With this type of mortgage, the lender has control over when that rate changes rather than the Bank of England.

What is an Offset Mortgage?

An offset mortgage is where your mortgage is linked to a savings account. When the bank calculates the interest you pay on that mortgage, any funds held in your savings account are subtracted from the mortgage interest calculation. So if you have a hundred thousand pound mortgage, and twenty thousand pounds in the linked offset savings account, you only pay interest on eighty thousand pounds.

With an offset mortgage, you can either reduce your monthly repayments or pay your mortgage back quicker, simply by having money in your linked savings account. You won’t typically earn any interest on the money that’s held in the savings account, however.

You can also take the money out of the savings account any time. There’s no specific withdrawal times or time that you have to leave the money in the account. An offset mortgage is very useful for people that don’t want to use their savings towards a mortgage, but can still benefit from having the savings, by reducing the amount of interest on their mortgage.

Jargon Busting Repayment Types

A mortgage has two parts, the capital, which is the money borrowed and the interest, which is the charges made by the lender on the amount borrowed.

Repayment Mortgage

When you have a repayment mortgage you’re paying back both the capital and the interest together so that when you get to the end of the mortgage term, you’ll have fully paid that mortgage off and have a zero balance.

Interest Only Mortgage

When you take an interest only mortgage, you’re only paying the interest with your monthly repayments. This means that the original amount you borrow is still repayable at the end of the term.

This would make your monthly payments far lower, compared to a repayment mortgage. However, you’d need a large amount of money to pay off your loan at the end of the term.

What is a Flexible Mortgage and When Would it be Used?

A lot of mortgages these days have flexible features as standard. So there is no actual ‘flexible mortgage’, just mortgages that can have flexible features added to them.

Daily Interest Rate Calculation

Having your interest calculated daily is one feature. This means that if you were to make any overpayments on the mortgage, you get the immediate benefit. Originally interest on mortgages was calculated annually, now it’s calculated either daily or monthly allowing you to see positive results straight away.

Overpayments

A lot of mortgages these days allow at least a ten percent mortgage over-repayment of the outstanding balance or the original loan amount, without having to pay any early repayment charges. Sometimes lenders allow you to reduce the length of the payment term when you overpay.

Portability

Another flexible feature is portability. This potentially gives you the option of taking your mortgage to a new property with you. This can be quite useful, especially if you’re in a fixed rate mortgage with a reasonable remaining fixed rate term. You would probably have an early repayment charge if you decided to close the mortgage, however.

Payment Holidays

These are quite high profile at the moment due to the coronavirus pandemic. Payment holidays have actually been a mortgage feature for some time, however. Most lenders will allow you to have some sort of payment holiday, as long as you’ve made enough consecutive mortgage repayments

How can Mortgage Brokers Help and How Much do They Cost?

Momentum always offers free advice and a free initial strategy call to all clients. They can help both first time buyers and remortgagers alike.

If you’re getting to the end of your current fixed rate period and wondering what to do. Or perhaps you’re looking to sell your property and move on and want to see what options are available to you, then discussing this is free of charge.

A fee would only be payable if you go on to appoint them to support you through your mortgage application. You can book a free strategy call online at Momentum.mortgage or you can email them. Details can be found on the website.