Standard variable rate mortgages
Standard Variable Rate or SVR is a type of mortgage where the interest rate can change, influenced by the Bank of England’s base rate. Each bank sets its own standard variable interest rate, which is usually a few percentage points above the Bank of England’s base rate. SVR is one of the more common types of mortgages, with many leading lenders offering at least one and sometimes several to choose from, with different interest rates and terms.
You will most likely move on to this type of mortgage after taking out a fixed rate, tracker, or discount mortgage.
A lender can increase or decrease its SVR at any time, and as a borrower, you have no control over what happens to it.
An advantage of this type of mortgage is that you can usually overpay or switch to another mortgage at any time without incurring a penalty fee. Another advantage is that when the Bank of England’s base rate falls, the interest rate usually falls. The downside is that the rate can go up at any time, which is worrying if you’re on a tight budget. The lender is free to increase the interest rate at any time, even if the Bank of England’s base rate does not increase.
Fixed rate mortgages
A fixed-rate mortgage means that the interest rate is fixed for the duration of the deal. Fixed-rate mortgages are suitable for those who want to budget and prefer to know exactly what their monthly expenses are. You don’t have to worry about general interest rate increases and you can be sure that your payments will not increase during the fixed-rate period. If the mortgage is repaid during the specified term, a prepayment penalty may be charged.
In addition to the standard adjustable and fixed rate mortgages, there are a few other types that you might want to consider before choosing the right one for you. You can even combine some of the options.
Discount variable mortgages
Basically, a discount mortgage offers an introductory offer. This type of loan is cheaper at the beginning of your mortgage than the standard variable rate. This allows you to benefit from a discount for a certain period at the beginning of your mortgage, usually in the first 2 or 3 years. When the fixed period comes to an end, the interest rate is higher than the standard variable interest rate.
The reduced introductory interest rate is variable, as is the interest rate that follows it. So be aware that just like a standard adjustable rate mortgage, the amount you pay is likely to change over the term of the mortgage in line with the Bank of England base rate. Also note that the discount offered at the beginning can be very good, but you have to look at the total price offered.
If the mortgage is repaid during the discount period, a prepayment penalty may be levied.
With a tracker mortgage, the interest rate is linked solely to the Bank of England’s base rate. When the Bank of England interest rate goes up, so does the interest rate you pay. When the Bank of England interest rate falls, your monthly repayments go down. In comparison, the interest rate on a standard adjustable rate mortgage is similarly linked to the Bank of England base rate, but can also be changed by the mortgage lender whenever they wish and for whatever reason. With a tracker mortgage you are guaranteed that the interest rate reflects only the Bank of England interest rate and is not influenced by other factors.
This type of mortgage is designed to meet your changing financial needs. It can allow you to overpay, underpay, or even take payment vacations. You may also be able to make fee-free lump sum refunds. If you overpaid, you may be able to take back a loan as well. However, to allow for all that flexibility, one can only expect interest rates on flexible mortgages to be higher than most other repaying mortgages.
Fixed rate mortgages
Capped mortgages offer you a variable interest rate, similar to standard adjustable rate mortgages. The difference is that your rate has a cap. This guarantees that the price will not exceed a certain amount.
It sounds like a lot, but there’s a downside. The bank starts the mortgage at a higher rate than the normal standard variable or fixed rate. This is to protect the bank should future interest rates rise above the rate set for you.
Also, the caps are usually quite high, making it unlikely that the Bank of England’s base rate will rise above this over the life of the mortgage.
Because the bank can adjust the interest rate on this mortgage at any time, up to the cap, it’s best to think of the cap as the maximum amount you might have to pay each month.
offsetting of mortgages
Offset mortgages are sometimes referred to as checking account mortgages. You link your bank account to your mortgage. If you have savings, they go towards the balance of the mortgage. For example, if you have £20,000 in savings and a £200,000 mortgage, you will have to pay interest on the £180,000 balance. You won’t earn interest on your £20,000 savings, but you won’t have to pay interest on your £20,000 mortgage.
Some offset mortgages link only to your checking account, while others link to both your checking and savings accounts. Offset mortgages are also available for fixed rate offerings or a range of variable rate offerings.