November 24th, 2010
Which mortgage is best for you?
In the UK, fixed rate mortgages typically account for between 50% and 75% of new mortgages, while tracker deals or variable rate linked offers make up most of the rest, according to the Council of Mortgage Lenders.
Often the best deals offered by lenders are those that offer an initial special rate, (fixed or variable) for a set period, typically between two and five years.
After the initial period has ended, borrowers will then pay back their mortgage at the lender's variable rate, which has generally been around one to two percent above the base rate.
A good mortgage will allow borrowers to leave at a minimal cost once the initial deal period has ended and allow them to attempt to secure another good deal.
When the deal has ended, there is a tendency for people to stay with their existing lender although this is normally because changing your mortgage provider can be deemed as difficult and too much hassle. At any one time there will be hundreds of different mortgage schemes available and picking the right one for you is one of the biggest financial decisions you will make.
Your Options
Standard variable rates
Borrowers who fail to regularly monitor the value of their mortgage deal tend to end up on standard variable rates. The repayments on these tend to be uncompetitive when compared to special offers on the market. The rate moves broadly in line with the Bank of England's base rate, although the lender is not obliged to pass on the changes to the letter. Currently base rates are very low and many borrowers are benefiting from low SVR rates. However, as your lender is not obliged to pass on reductions and lenders determine their own standard variable rate there are many different rates offered, varying by as much as 5% between one lender and another.
If you remain on the SVR rate you must be prepared for higher mortgage payments should base rates increase.
Tracker mortgages
These deals work in a similar way to variable rate mortgages. The difference is that the mortgage tracks the Bank of England base rate rather than the lender's standard variable rate. The advantage is that you are guaranteed to benefit from the full effect of any rate change but would see an increase in payments when the base rate rises. Tracker mortgages have performed very well in the past few years given that base rates have only reduced.
Fixed rate mortgages
If you are someone who likes the security of knowing your repayments won't change, then a fixed rate mortgage is probably the best for you. However, rates on fixed rate mortgages are higher than for variable mortgages.
Two-year fixed rates are the most popular with British homeowners, but increasing numbers of borrowers are turning to longer term fixed rates of five or ten years. These longer measures give more security and cut down remortgaging costs, but you will have to pay a hefty penalty to leave.
Conclusion
To put it simply, if you choose a fixed rate mortgage and interest rates remain low, you could end up paying more than you need to for your mortgage. But if you go for a variable or tracker mortgage and interest rates rise, then you could end up with a much more expensive monthly mortgage bill.
The decision as to which mortgage to take is often taken on the basis of your opinion as to whether interest rates will rise or fall. This is though surely something of a gamble as nobody knows the answer and we can only really speculate. It is however too important a decision to gamble on with potentially severe consequences if you get it wrong and advice should always be sought before entering into any agreement.
Should you require professional advice please click on the ‘Speak to an Adviser’ button below.