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Different Types Of Mortgages

Buying a property can be one of the most stressful episodes in your life. It is a risk too, and complicated. We took a look at the different types of mortgages, and how they may help you make the right decision.

Different Types Of Mortgages – Fixed Rate Mortgages

Your interest rate is guaranteed with fixed-rate mortgages for a predetermined amount of time. For a predetermined amount of time, your monthly payments don’t fluctuate. What’s more, they won’t until a predetermined date. This may last for two to five years, up to ten years, or even longer on occasion.

Most people with mortgages have fixed-rate agreements. In 2022, approximately 95% of all new loans had fixed rates, and 85% of all homeowners already have a fixed rate mortgage.

Their Advantages

Regardless of what happens to interest rates, fixed mortgages are fantastic for the security and peace of mind that come with knowing exactly what you have to pay each month throughout the fixed period.

By making a fixed monthly payment, you’ll also know how much your mortgage will still be worth at the conclusion of the fixed-rate period. It’s useful to know this. Since your loan to value (LTV), which is defined as a percentage and represents the size of the mortgage you need as a proportion of the value of the home you want to buy, will be greatly impacted by the amount you owe at the end of the mortgage arrangement. This will have an effect on your next deal’s price as well.

Disadvantages

A fixed-rate mortgage may have higher interest rates than other mortgages. Additionally, unlike with a tracker mortgage, your monthly payments won’t decrease if the Bank of England Base Rate declines throughout the fixed period.

When the fixed period expires, it’s likely that you’ll be automatically switched to the lender’s Standard Variable Rate. This typically carries a higher interest rate than the fixed arrangement you were previously on. It’s a good idea to make plans well in advance of the end of your fixed period. This is because once your arrangement is through, you’ll be free to switch to a new mortgage.

Lender Obligations

Lenders are required to secure this finance for the duration of the term because you are on a fixed rate. Therefore, you will incur an Early Repayment Charge if you pay off your loan in full or make sizable overpayments. This amount is often greater than 10% of your outstanding sum. They often represent a portion of your unpaid balance and disappear over time. If you have a 5-year fixed-rate agreement, for instance, the ERC will normally be around 5% in the first year of your term. It will decrease to around 1% in the last year.

Almost all lenders allow you to port your mortgage. This is when you change homes during a fixed-rate arrangement without having to pay an ERC. And a new rate will apply to any additional loans you make. So, if you stay with your existing lender, there won’t be an ERC when you move. 

Different Types Of Mortgages – Tracker Mortgages

When examining different types of mortgages, this is one of the key options. The interest rate on a tracker mortgage typically varies according to the Bank of England’s (BoE) Base Rate plus a percentage determined by the lender. Therefore, changes in the Base Rate may cause changes in the mortgage interest rate throughout the tracker term.

Therefore, if the Bank of England Base Rate changes by 0.5%, your tracker rate will also change by 0.5% if your mortgage is set at 1% above the BoE rate. For example, if you have a mortgage of £150,000 with a term of 25 years and a rate of 2.5%, you will currently pay £673 a month. If the Base Rate goes up by 0.5%, you will now have an interest rate of 3%, and pay £712 a month. However, if Base Rate is reduced by 0.5%, you will now have an interest rate of 2%, and pay £636 a month.  

Trackers normally last for two years, but they can last for the entire mortgage term. You will automatically transition to the lender’s standard variable rate after your tracker period is over.

Advantages

Additionally, it implies that you are free to switch rates whenever you want without paying an ERC. This implies that you might either refinance with a different lender. alternatively, you might switch to a fixed rate with your current lender.

If you have a tracker product and move, you can still ‘port’ it. However, any new borrowing you do will have a new rate. In contrast to fixed-rate programmes, if you decide to take up a mortgage with a different lender after moving, you won’t be assessed an ERC fee.

Lender Influencing

Your mortgage rate cannot be influenced by lenders throughout the tracker term. Your mortgage will typically follow the BoE Base Rate plus the lender’s percentage. This is because it is typically correlated with that rate.

Trackers often don’t have Early Repayment Charges (ERC). This means you can make any number of overpayments without incurring fees, unlike fixed-rate mortgages. This may be advantageous if your income is unpredictable. Or if you anticipate receiving a sizable lump amount, such as an inheritance, that you wish to use to pay down your mortgage.

Disadvantages

Payments on your mortgage could alter at any time. Your payments will increase if the Base Rate increases. In a same vein, your interest rate will decrease if they do. As a result, you lack the security that comes with a fixed-rate mortgage.

As a result, you’ll need to be sure that you can manage monthly payment changes and that you can afford extra payments. Although it may seem apparent, if your tracker rate increases, your payment will go up the larger your mortgage.

Lender Contact

Every time your tracker rate changes, your lender is required to contact you to let you know what your new payments will be. They must provide you adequate notice and notify you before your subsequent payment is due.

You won’t know with as much precision what your mortgage balance will be when your tracker rate expires if your monthly payment is variable.

Knowing your balance is important since it will affect your loan to value, which will affect the price of your subsequent agreement, and the amount you owe when the mortgage deal is through.

Different Types Of Mortgages – Standard Variable Rate Mortgages

Your lender sets the interest rate on an SVR mortgage. This is often the rate you would automatically switch to when your fixed or tracker contract expired. Since SVRs are erratic and not correlated with Base Rate. The lender has more control over the rate and the timing of changes.

The majority of lenders will, in fact, simply alter their SVR rates. They will do this in response to a change in the Base Rate. The precise amount of change will depend on the specifics of each lender. And occasionally, lenders won’t adjust their SVRs in reaction to a change in the BoE Base Rate.

Lenders have two options for informing impacted consumers of changes to their SVR. First, the lender will contact every customer who is paying the SVR personally. They will provide them with a tailored explanation of the effects. This includes the amount of their new monthly payment.

Second, the lender will make its SVR available to customers who are still paying their fixed or tracker rate, often on its website, so that they are aware of the rate and may plan for it properly.

Different Types Of Mortgages – Similarities

The benefits and drawbacks of SVRs resemble those of trackers in many ways. Without incurring an Early Repayment Charge, you are free to make an unlimited number of overpayments. Alternatively you may switch to a different product, switch lenders, or fully pay off your mortgage.

The drawbacks are comparable as well, but with one significant exception.  SVRs typically have higher rates than a lender’s fixed or tracker plans, making them less appealing to many borrowers. The majority decide to switch to a new lender (commonly referred to as remortgaging). Instead, they may receive another fixed or tracker rate. They can do this with either with their current lender. Some lenders refer to this as retention products or switching.

Loan Expiration

Three to six months before to the expiration of your loan, lenders will typically contact you. They will discuss your choices. If you obtained your mortgage through a broker, it’s probable that they will contact you at this point. They will talk over your options, which may include sticking with your current lender. alternatively, the option exists to switch to another one.

 

 

 

 

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