Mortgages
Mortgages are primarily used by people wanting to buy their home, this is because for the vast majority of people, the price of a house or flat is far more than they could afford to pay for out of their income or savings. As such, the convention is to put down a deposit, usually from savings, and borrow the rest of the money needed to fund the purchase from a mortgage lender (bank or building society).
There are many different types of mortgage, all offering different options for the borrower. The following is a brief description of each different type, with some useful guidance on which type is best for different types of borrowers.
Fixed Rate Mortgage
The interest rate is fixed for a specified period of time, ranging from 1 year to 10 years, the most common periods are 2, 3 and 5 year fixed rate periods. The advantage of a fixed rate mortgage is the interest rate, and therefore the repayment is fixed for the specified time period, making it easier for the borrower to plan their monthly budget. This type of mortgage should be used by borrowers that do not like to take risks and those that like to know how much there repayment will be every month.
Tracker Rate Mortgage
The interest rate is fixed at a margin above the Bank of England base rate, and tracks any movement in the base rate, such that if the base rate goes up or down, there will be an equal increase or decrease in the interest rate on the borrowers mortgage. This type of mortgage is good for borrowers that are prepared to take a risk.
It’s usually a good idea to ensure that a borrower can afford the mortgage should the base rate rise by 1%. Before opting for a tracker rate mortgage, it’s best to take advice on where the base rate may be headed in the coming months and years as this will give an indication as to likely falls or rises in the monthly repayments.
Variable Rate Mortgages
Uses the lenders’ variable rate, sometimes discounted for an initial period (known as a discount mortgage). Unlike tracker mortgages, the lenders’ variable rate does not always follow the Bank of England base rate. It will usually be a margin of 1.5% - 2% above the Bank of England base rate, but lenders’ have been known to keep their variable rate higher during times of financial crisis (such as the credit crunch of 2007-2008). This type of mortgage would only normally be used by borrowers without any other options, as it is always preferrable to opt for a tracker rate, as they have to track the Bank of England base rate.