If you have been doing research on mortgages available today, you will already know that you have a choice between fixed rate and variable rate mortgages. These mortgages have some clear-cut differences, but if you still want to be sure of what you are getting into, then you should learn more about the main differences between the two. Learning as much as you can about fixed rate and variable rate mortgages goes a long way in helping you make the right decision for your finances – and your future.Not too mention if this is your first time purchasing a home.
The basics on fixed rate mortgages
As its name implies, a fixed rate mortgage is just that – an arrangement between you and the lender that your mortgage interest rate will be fixed for a specified period of time,
regardless of if interest rates rise (or fall). This is what is known as an incentive period, which can stretch from one year to ten years or more.
If you opt for a fixed rate mortgage, you have the advantage of knowing exactly how much you will pay every month, because your rate will not change. However, with a fixed rate mortgage, the starting interest rates are usually more expensive or higher than on variable rate mortgages, and, if the interest rates go down, your payments will still remain the same. Also, with a fixed rate mortgage, if you want to repay your loan early, you may have to pay a steep penalty.
The basics on variable rate mortgages
Simply put, a variable rate mortgage is a mortgage where the interest rate can rise and fall depending on changes in the economic situation. What makes a variable rate mortgage more complex, however, is the fact that there are three separate categories: SVRs or Standard Variable Rate mortgages, tracker mortgages, and discount mortgages.
- The difference between SVRs, tracker mortgages, and discount (rate) mortgages
Lenders have Standard Variable Rates which they can easily move when they prefer. In most cases, the SVR of each lender closely follows the movements of the base rate of the Bank of England. Usually, Standard Variable Rates can range from 2 to 5 percentage points from the Bank of England base rate. SVRs are not that common and they can be inexpensive. However, they are also quite risky because you often have no idea when the mortgage lender will change their rate. However, with an SVR, you don’t have to worry about charges for early repayment, as you can pay back the complete mortgage any time.
Tracker mortgages, meanwhile, are where the rate follows (or tracks) an economic indicator which is fixed (such as the base rate of the BoE). This doesn’t necessarily mean that the tracker mortgage rate is the same as the BoE rate – it just means that it is in sync with it. The benefit of a tracker mortgage is that the rate will only follow economic changes rather than the lender’s need for commercial profit. However, if the rates go up, your rate will go up as well.
A discount rate mortgage is when you get a deal or discount below a lender’s SVR. These discounts only last for a short time – often just 2 to 3 years. There is a level of uncertainty regarding discount rate mortgages, however, because you don’t have any guarantee that the lender will reduce their rates even if the BoE base rate falls.
Mortgage deals can be a bit confusing, so if you want expert advice and suggestions, you should consult a qualified mortgage broker. Mortgage advisers from Seacco have extensive experience and knowledge of different mortgage deals and financing services, including property development finance, residential development finance, among others.
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