With so many changes occurring in the mortgage market as a result of the credit crunch, we thought we’d shed some light on the different types of mortgages that are available.
One of a variety of different types of mortgage on the market, Standard Variable Rate mortgages l;trackers operate on a variable rate that is linked to the movement of the prevailing Bank of England Base Rate or London Interbank Offered Rate (LIBOR).
Tracker mortgages are so called because they are tied to the rate, and ‘track’ changes in base rate.
Therefore, if base rate climbs by 1 per cent, the pay rate also increases by 1 per cent.
For example if the tracker mortgage is set at 1% above The Bank of England Base Rate for 5 years and the base rate is currently 4.75%, the pay rate will work out at 5.75%.
The main difference between a variable rate mortgage and a tracker mortgage is that the loan is directly linked to an interest rate.
In a climate of falling interest rates, borrowers can enjoy reduced mortgage repayments. Variable Rate mortgage lenders aren’t obliged to pass on the whole of the reduction. A tracked mortgage will follow the reduction.
A number of different rate tracker mortgages operating over different time periods are on the UK market.
There is two-year, five-year, ten-year and mortgages that track a rate for the life of your loan.
Application, product and valuation fees, and flexibility of the loan will depend on the lender and your circumstances. It’s always worth discussing your tracker options with a professional advisor on mortgages, such as Natwest and hunting down quotes on loans comparison website like Beat that Quote.
Discount variable rate mortgages
With discount rate mortgages the interest rate you pay is set below the SVR for a specific period.
For example, if the SVR is six per cent, your rate could be five per cent, giving you a one per cent discount. Then if the variable rate rises to seven per cent yours would rise to six per cent.
As with the variable rate, this would mean that you could benefit from lower payments but they may go up as well as down.
One major consideration of a discounted rate mortgage that must always be born in mind is that at the end of the discounted term your mortgage repayments WILL increase back to the standard rate.
Capped Rate Mortgages
Capped mortgages behave similarly to fixed-rate mortgages, in that they will not climb above a pre-set rate, known as a cap.
For a certain period a lender will offer a ceiling or cap above which repayments of interest cannot rise.
Should the standard variable rate of the mortgage fall below the capped rate interest rate repayments will fall accordingly. As the borrower is aware of maximum level of repayments it makes repayments easier to budget.
Most capped rate mortgages have a clearly set minimum rate (known as the collar) to which they can fall. It is imperative that borrowers are aware of what the collar on their loan is.
Tracker capped rate mortgages are a recent addition to the market place. Tracking the Bank of England base interest rate in the style of a normal tracker mortgage they guarantee to fall alongside rates, or rise to a certain level if rates climb. Rates on these products will typically change two weeks after a base rate change.
Capped rate mortgages allow the borrower peace of mind, because they guarantee that interest rates will not rise beyond a certain, pre-agreed limit during the course of the capped rate period.
On the whole though, they are slightly more expensive than equivalent fixed-rate mortgage loans. In addition they tend to lack flexibility and early redemption penalties can be high.
Capped rate mortgages can also often attract high application fees; the best policy is to keep updated with offers and quotes from financial providers that showcase polices on the web.
Buying a house is a life long investment, some people forget that
Hi Dana. That’s an interesting point. I guess that you have to look at the terms of your mortgage to see how your lender handles this situation.
Although base rates are now 1% in the United States, it is highly unlikely (but not impossible) that rates in the UK will fall to such a low level. It will be interesting to see what happens to UK base rates next Thursday. I think we can expect at least a 0.5% rate cut.
What if rates dropped as low as 1% or lower, do most tracker mortgages have a cut off point to how low the Bank of England’s base rate can drop to, and where they are willing to discount their rate to?
I have a rate or +0.96 above the base rate, the way things are going I could be paying less than 2% in 12months time if they continue to cut rates.