Finding the best mortgage for your needs is important and there are a number of different mortgages to choose from. With most lenders moving away from interest only mortgages, the vast majority of available mortgages are repayment mortgages, which include an element of interest and capital payments.
The main types of mortgages to choose from in this category are:
Fixed rate mortgages have the interest rate pegged at a set period. The agreed period of the mortgage can last for a various amount of time although common options are one year, two years, three years, five years or ten years.
As the name suggests, the amount of money you pay each month for the mortgage stays the same, no matter what happens with the interest rate. If you have an agreed rate of 4% and then the base rate set by the Bank of England rises, you will continue to pay 4% until the agreed end date of the mortgage.
The obvious benefit of a fixed rate mortgage is that you know exactly what you will pay every month. If you don’t have much leeway with your budget, the fixed rate mortgage is the best option because this gives you the comfort of knowing exactly what you will pay.
The fixed rate mortgage is the most expensive rate when starting out and if interest rates fall you won’t receive the benefit. However, many people think the consistency on offer from this mortgage makes it the obvious choice.
A tracker rate mortgage has a variable rate of interest and it follows (or tracks) an economic index, such as the base rate of the Bank of England. Whatever the interest rate changes by, your rate will change by the same amount.
As an example, if you obtained a mortgage that tracks at a rate of 1% above the Bank of England base rate, a base rate of 0.5% would see you having a mortgage rate of 1.5%. If the base rate rises to 1%, your mortgage rate becomes 2% and if the base rate falls to 0.25%, your mortgage rate falls to 1.25%.
This style of mortgage lasts for a number of years but there are lifetime tracker deals available. If you believe the base rate is going to fall or stay low, and you have a suitable tracking rate, this is an excellent option. Of course, if the base rate rises significantly, the amount of money you pay each month rises, so you need to be financially flexible enough to deal with that.
As the name suggests, this is a mortgage where the rate can go up or down every month. While variable rate mortgages tend to follow the base rate, they don’t necessarily follow the base rate exactly. This is why you need to review the history of the lender and consider what they are more likely to do.
While this style of mortgage could see the lender raising the rate to a level above the base rate, which means you would be worse off compared to other mortgages, there may be times when the lender, for commercial reasons, lowers their rate. The degree of flexibility with variable rate mortgages offer the opportunity to make savings but it does require borrowers to be flexible.
All three of the mortgage types offer benefits and what is right for you will often depend on your own circumstances. There is no denying that many people favour the fixed rate mortgage because of the consistency on offer. Knowing how much you have to pay each month for your mortgage is a great comfort for many people and this is why the fixed rate option is the best option for a lot of people.
However, if you have a greater degree of flexibility with your finances, the chance to pay a lesser amount on certain months make variable rate mortgages and tracker mortgages more attractive at times. Be sure to seek advice and make a decision that is right for you and your financial circumstances.