Which mortgage is right for you – Fixed Rate, Variable Rate, Interest Only?
Carr Berman Crichton don’t arrange mortgages. However, we deal with a wide range of mortgage brokers who do. Despite that fact, we do know a lot about the different kinds of mortgages you can have. So, we thought we’d explain what kind of mortgages are available and you can decide which mortgage is right for you.
Fixed Rate Mortgages
These types of mortgages give you some certainty. The interest rate is fixed for a period of time. This might be two years or five years. Increasingly, we’re seeing ten-year fixed rate mortgages coming onto the market.
A fixed rate mortgage gives you certainty in what you’ll repay each month during the fixed rate period. That means whatever happens to the mortgage rate, you’ll pay the same each month. So, you’ll be better off if the mortgage rate goes up. But you’ll not benefit if the mortgage rate goes down.
You automatically revert to the lender’s standard variable rate when your fixed rate period ends. This might suit you. However, if it doesn’t, you could always shop around for a new fixed rate deal.
On the downside, you’ll pay a penalty if you repay the mortgage before the fixed rate period ends. There are also likely to be arrangement fees when you opt for this kind of mortgage.
This is a very popular, especially with first-time buyers. However, only you can decide if this kind of mortgage is right for you.
Variable Rate Mortgages
There are a number of different styles of variable rate mortgages. There’s the Standard Variable Rate, the Discount Mortgage and the Tracker.
Standard Variable Rate
Every lender has its own Standard Variable Rate and it can set it at whatever level it wishes. You will move to this rate once your fixed rate deal is finished. It’s normally higher than other rates on the market.
You’re not locked in with a Standard Variable Rate mortgage and there are no penalties when you repay it. Usually, these are no arrangement fees for this type of mortgage.
This type of mortgage is tied to the lender’s standard variable rate. As the name suggests, however, you receive a discount against that rate, usually for a period of time.
If the lender’s standard variable rate is, say, 5% and the discount is, say, 1.5%, you’ll be charged 3.5% on your mortgage.
You have to be very careful when selecting a discount mortgage. You need to take both the standard variable rate and the level of discount into account. A larger discount from a higher standard variable rate might not be as good as a smaller discount from a lower standard variable rate!
When the standard variable rate falls, the discount rate falls. However, if the lender increases the standard variable rate, the discount rate increases too.
These mortgages move up or down depending on movement of Bank of England interest rates. For example, if your initial interest rate is 3.25% and the Bank of England increases its rate by 0.25%, your interest rate will increase to 3.5%. If it cuts its rate, your interest rate will fall by the same amount.
The payments for these types of mortgages can go up and down over time as and when interest rates change.
Variable rate mortgage payments can go up or down. Only you can decide which mortgage is right for you.
Interest only mortgages
As the name suggests, you only pay interest for the duration of the mortgage. The actual repayment figures are lower because you’re not paying back any element of the capital.
However, you’ll still owe the same amount as you borrowed when you reach the end of your mortgage term. You’ll either have to pay off the mortgage from your savings or sell the property to pay off the loan. You can always re-mortgage and start the process all over again!
If you would like us to refer you to a mortgage broker to give you clear advice on the type of mortgages available to you, please contact us. With some help, you’ll discover which mortgage is right for you.