A Guide to Mortgages Part 2

by Mark Johnston

As well as deciding on a repayment method, borrowers need to look at the different interest rate products on offer.

The fixed rate mortgage:

With a fixed rate deal the amount repaid each month is at a fixed interest rate for a specified period of time, irrespective of changes in the bank of England’s base rate. This is usually around 2 to 5 years, but many lenders are now offering longer terms such as 10 years.

As a rule of thumb the shorter the period of time a borrower fixes for, the lower the rate will usually be.

However if interest rates fall below the fixed rate amount, the borrower will not benefit from this, with a reduction in their monthly payments as with other products.

The main advantage of a fixed rate period is that it makes budgeting much simpler for a borrower, as they know exactly what they will be paying each month and the amount does not change until the fixed term has finished.

These mortgages are of particular help to those borrowers trying to ‘juggle’ financial problems with increasing household bills, reduced working hours and increasing inflation costs.

Borrowers should be aware when opting for these mortgages that they can not simply walk away from the deal if it no longer suits them or if their circumstances change. Fixed rate mortgages always incorporate early redemption penalties and these penalties are usually quite expensive.

As with most mortgages on completion of the fixed rate term, the mortgage will then revert to the lenders standard variable rate (SVR). At this point the borrower may want to consider re-mortgaging to a better deal.

The standard variable rate mortgage (SVR):

Many mortgage lenders standard variable rate (SVR) used to be 2% above the bank of England base rate, however due to the banking crisis and the subsequent ‘slashing’ of the base rate to 0.5%, the standard variable rate (SVR) now stands at anything from 2% to 6%.

A variable rate rises and falls in line with general interest rates in accordance with market conditions. In general if interest rates rise than the mortgage rate will increase along with the borrower’s monthly payments and vice versa.

For example: a borrower may choose to have a variable rate of 2%, this simply means that the mortgage interest rate will follow the pattern of the bank of England’s current figures plus the additional 2%. Therefore if the bank of England’s basic rate was 4.5% the borrowers would pay 6.5% interest.

The advantage for a borrower on a standard variable rate (SVR) mortgage is that they can switch mortgage lenders more easily than on any other rate, as there are no early redemption charges.

The disadvantage of a standard variable rate mortgage (SVR) is that they are far less straightforward for financial budgeting and there it can be hard for borrowers to manage their payments if the bank of England base rate increases sharply.

All in all a standard variable rate (SVR) mortgage is usually not the most competitive interest rate on offer.

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