|
|
|
|
|
|
| |
Standard Variable Rate / Discounted
/ Tracker / Fixed
/ Capped
Other features:
Flexible / Offset |
| |
Standard Variable Rate (SVR)
The standard variable rate is defined as a rate that the lender changes from time to time, depending on market conditions. This should not be confused with a Tracker Mortgage, which varies only with the Bank of England base rate. The standard variable rate can be changed to whatever the lender feels it needs (or wants) to charge.
The standard variable rate tends to move in line with the Bank of England base rate, although the margin between the two rates may vary from lender to lender. With a tracker mortgage, the interest rate is set at a specific level above or below the Bank of England base rate or some other base rate.
The standard variable rate is generally considered to be the least competitive rate on the market and most people will find they are placed onto the SVR after the initial incentive period has ended, such as discounted or fixed rate mortgages. The SVR makes the lender a decent profit, and is used to recoup the initial investment in generous discounts and fixed rates, used to lure a new customer to a mortgage product.
Quite often, the standard variable rate is used in combination with other offers to retain customers in the longer term. For example, a lender may offer a flexible mortgage that allows overpayment and repayment holidays, but to compensate for this flexibility will charge the SVR.
As with a tracker mortgage, this is best during periods when the interest rate is low. As there is no cap, the standard variable rate could prove to be an expensive option with a rising base rate, but will benefit you as the base rate falls.
Our advice for those on standard variable rates is to shop around to see what remortgage deals are available on the market. If you're interest is SVR, the odds are that there will be many more competitive deals on the market. However, note that some mortgage providers will tie in the borrower for a set period to the SVR, particularly if they have offered generous terms early on in the mortgage, such as a discounted rate or cashback.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
| |
Discount Mortgage
A lender may offer a mortgage with an initial interest rate set at a fixed level below the mortgage provider's standard variable rate (SVR). This SVR will change as it tracks the Bank of England's base rate, but the discount will remain fixed for the length of the discount period. Once the discount period is over, the mortgage usually reverts to the lender's SVR, a rate that is generally considered to be relatively uncompetitive.
This type of introductory offer is aimed at individuals that would wish to begin their mortgage with a lower monthly repayment. This may be due to the borrower being a first-time buyer, someone that needs to use some of their short-term income to purchase other items or possibly just someone expecting a wage rise over the next few years who would like reduced payments until their salary increases.
WHY DO BANKS OFFER DISCOUNT MORTGAGES?
Discount periods typically last 1-5 years, working under the simple rule that the greater the discount, the shorter the discount period. These products are generally a loss-leader by the lenders. They are happy to lose money in the short-term, as they are confident that many individuals will continue with the mortgage after the discount period ends. At this point, the banks will more than likely profit from the borrower.
An option that is therefore considered by most people as they approach the end of their discount period is to remortgage and find another attractive offer. While it is true that this will benefit the consumer, there are two reasons for resistance to changing lenders:
1. The borrower will not attempt to remortgage.
This is basically what the banks are hoping for. Some people will not bother to shop around for a better deal, content with continuing with their existing mortgages. If this happens, the banks strategy has been successful, and they will profit from the consumer's inertia.
2. The lender may charge substantial early repayment charges.
The lender may insist that once the discount period is over, that the borrower has to remain with the mortgage provider for a set period, paying the standard variable rate. This allows the bank to recoup the money they have initially "invested" in the customer in the hope that they will remain with them. Leaving before this period, the borrower may be faced with high early repayment charges if they attempt to switch borrowers.
AS THE DISCOUNTED INTEREST RATE PERIOD ENDS.
Put simply, it is certainly worth shopping around as your discount period (or longer tie-in period) ends, to ensure you find the best suitable deal on the market. Several mortgage providers offer to pay all legal costs involved with a remortgage, and some even occasionally offer to pay the early repayment charges of switching mortgages. However, a word of caution: when a lender offers to pay these costs, it usually translates into a higher interest rate or another extended tie-in period. This is the same loss-leading marketing idea that the discount mortgage is based upon.
It is therefore worth ensuring that you read the small print on any mortgage, to discover the extent of any early repayment charges and any other costs that will factor into your thinking, such as the legal fees involved.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
| |
Tracker Mortgage
The tracker mortgage is a very popular mortgage product in the UK and ca be based around the Bank of England's base-rate or other indexes e.g. LIBOR.
Once a month, the Bank of England Monetary Policy Committee (MPC) meets and decides on an interest base-rate for the following month. If you have a tracker mortgage, it is this meeting that will decide your interest rate; lenders will set their rates at a fixed margin above or below the Bank of England base rate.
This type of mortgage is a good idea when the Bank of England's base rate is stable or falling. However, with each interest rate rise, there is a corresponding increase in your monthly repayment. This means a rising base-rate can have a significant impact on your monthly disposable income.
BASE RATES AFFECTING MORTGAGE REPAYMENTS
The underlying problem with this type of interest rate product is the uncertainty surrounding the MPC's decision on base rates. Although there are many observable signals that lead to pretty accurate predictions of changes in base rates, the duration of a mortgage (up to 30 years) means that it is impossible to provide accurate forecasting for the life of the loan. There is also the possibility of a "shock" to the economy, which in turn may lead to a rapid movement in interest rates.
Even without any shocks, a slow increase in interest rates would see a gradual swelling of mortgage repayments. This could put a lot of pressure on a homeowner with a tracker mortgage, as it lowers their "take home pay". One way to protect against this is to obtain a fixed or capped rate. However, these types of mortgages will charge a slightly higher interest rate; a premium for the added security of knowing there is a limit to the increase in monthly repayments.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
| |
Fixed Rate Mortgage
With a fixed rate mortgage, your monthly repayments are fixed for a set period of time, despite fluctuations in the Bank of England base-rate. Usually this term can be for between one and five years (but can be longer), after which the interest switches to the lenders standard variable rate (SVR).
A fixed rate provides a homeowner with the reassurance that changes to the Bank of England base rate cannot affect their monthly mortgage repayments. However, removing this element of risk comes at a price.
THE RISKS OF A FIXED RATE MORTGAGE
There is a risk involved in opting for a fixed rate mortgage. There is a chance that the Bank of England's base rate falls during the fixed-rate term. This is more an "opportunity cost"; you have missed out on the opportunity to save money, even though the price you pay has remained constant. It is therefore worthwhile opting for a tracker mortgage if it seems that the central bank's Monetary Policy Committee (MPC) will be leaning towards a lower interest rate for the foreseeable future.
SWITCHING FIXED MORTGAGES
With regards to risk, it is worth remembering that depending on your home loan, it is possible to switch your mortgage with relative frequency (typically every 2-5 years). It is usually best to see what offers are available as your fixed term draws to a close. After the fixed-rate term, the lender will usually charge their standard variable rate (SVR), which is usually uncompetitive.
It is also worth annually reviewing your fixed rate, and it is worth noting that many lenders will pay many of the switching costs involved in transferring your mortgage from one provider to another. It is certainly worth shopping around for fixed rate products when interest rates look set to rise, as this could lead to a substantial saving for your next fixed term. However, don't forget that your first port of call should always be your existing lender, who will be keen to retain your business and are thus likely to offer you competitive terms to stay with them.
Lenders may charge substantial early repayment charges for this type of product.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
| |
Capped Mortgages
Quite simply, a maximum interest rate ("cap") is set and the interest payable cannot rise above this level for the life of the cap, irrespective of an increase in base rates beyond this level.
Below this cap, the interest changes like a tracker mortgage or discount mortgage; tracking movements in the Bank of England base rate or the lenders standard variable rate. This is obviously quite a neat idea, as it ensures that you will not be disadvantaged by either a leap or fall in interest rates.
As with fixed rates, this type of insurance comes at a higher price. The interest "premium" paid - the extra percentage charged by the lender on top of the Bank's base rate - will be higher than with a variable rate. This means that a capped mortgage is only uncompetitive when interest rates remain stable and hover a little below the cap. In this particular circumstance, a flexible mortgage may save more money.
Obviously though, a capped mortgage is chosen in an unpredictable environment and a capped mortgage ensures that extreme movements ("shocks") in the base rate will not have too much of an impact on your monthly repayments. In this sense, both the capped and fixed rate products are good ways of ensuring that your monthly disposable income remains relatively smooth.
Some mortgage provides have both a maximum rate and a minimum rate. Such "cap and collar" mortgages are usually a little cheaper than a simple capped mortgage and provide some additional flexibility to a completely fixed-rate product. However, like a fixed rate mortgage, a considerable drop in the Bank of England's base rate is unlikely to save you a great deal on your monthly repayments.
Lenders may charge substantial early repayment charges for this type of product.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
| |
Flexible Mortgage
A flexible mortgage accommodates a flexible repayment schedule. In other words, you can overpay on monthly repayments, pay lump sums into your mortgage and some mortgage providers offer "payment holidays" - a window of a few months without making any repayments. All these features would be associated with flexible mortgages, but would not necessarily all appear on any single mortgage advertised as a "flexible mortgage".
The benefits of a flexible mortgage are pretty clear. If you happen to get hold of a sizeable amount of money and fancy paying off a chunk of your mortgage, you will not be penalised for doing so. Similarly, if you were to find yourself unemployed for a while or see your income drop for a short period, you would be able to postpone your payment for a few months while you solve your income shortfall.
Flexible mortgages are all the rage these days, with most lenders offering some kind of flexible mortgage product. They often work hand-in-hand with the growing range of offset mortgages that are being snapped up. In addition, they are now quite commonly linked to fixed rate and discount rate mortgages.
FEATURES AVAILABLE ON FLEXIBLE MORTGAGES
Many financial institutions will offer flexible features on their traditional range of mortgages. The most popular features offered are:
1. Penalty-free lump sum repayments - Should you earn a windfall, such as a policy maturity payment or an inheritance, you would be able to repay a large chunk of your mortgage, free from early repayment charges.
2. Overpayment - Should you wish to pay back some extra each month, you would be allowed to do this.
3. Underpayment - If you cannot meet the monthly payment, you may be able to pay less for any given month, or possibly have a "payment window" - authority to miss your payments for a few months. Some lenders will only allow a payment window if the borrower has overpaid in the past.
4. Increase borrowing - Some lenders will be prepared to let you borrow further funds against your mortgage. You will usually need equity available on the property to secure these funds.
Although many people will be tempted by some flexibility with their mortgage, flexible mortgages are particularly good for the self-employed, small company directors and other individuals that may have irregular incomes.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
| |
Offset Mortgage
These types of mortgages are a relatively new and innovative approach to personal finances. The offset mortgage (also known as a current account mortgage) varies from lender to lender, but the basic idea involves pooling all you financial assets and obligations into one place.
All your debt is transferred to your mortgage, charging an agreed mortgage-rate interest. Let us, for illustration purposes, say that this debt totals £100,000 and charges an interest rate of 5%.
Alongside this, your financial assets are placed into a linked savings/current account. This would include savings (if you wish to place them in) and usually requires you to pay your salary into this account. To use our example, imagine that this totals £30,000 held in a linked, instant-access savings account.
Normally, with a conventional savings and mortgage account held at one financial institution, you would make monthly mortgage repayments that are calculated using the 5% interest payable on your £100,000 mortgage. Alongside this, you would receive interest on your £30,000 savings, although usually this would necessitate the use of a high-interest savings account and a much lower interest current account for day-to-day purchases. Tax would be paid on the interest earned, although this may be reuced in some areas, such as investing in an Individual Savings Account (ISA).
With an offset mortgage, the lender would not pay interest on your £30,000 savings in the traditional way. Instead, rather than charge 5% on your £100,000 mortgage, they instead charge interest on £100,000 minus the £30,000 savings, thus charging interest in total on £70,000. This would therefore lower your monthly mortgage repayments.
This means that your £30,000 would be, in essence, accruing interest at 5%. If this 5% was paid to you normally, tax would be owed on the interest earned. By deducting this from your mortgage interest rather than paying it to you, it means there will be no tax to pay, resulting in an effective interest of 5% net (after tax). To get this sort of return on a normal investment, you would usually have to earn around 8% gross (before tax), although this depends on your annual income.
Quite often, these types of combined accounts also act as a flexible mortgage, allowing money to be transferred between the two accounts with ease - both to increase borrowing through the mortgage account and conversely to overpay mortgage repayments (or repay large lump-sums) to reduce your overall debt.
This is a great innovation to the mortgage market and there has been a rapid increase both in the number of offset mortgage products available and the use of these mortgages by homeowners. Many banks and building societies have now entered the market for this type of mortgage.
|
| Need advice ? Click here to ask the expert! |
| |
| >> back to top |
|
|
|
|
| |
Moneytomove is a trading name of Moneytomove Ltd which is an Appointed Representative of Pink Home Loans. Pink Home Loans is a trading name of Advance Mortgage Funding Ltd which is authorised and regulated by the Financial Services Authority. FSA Reg No. 305008.
Registered office: Flat, 119 Portobello Rd, Notting Hill, London W11 2DY. Registered in England, Number: 5425034
|
| Key Facts about our Mortgage Service |
|
|
