Mortgage Types

Standard Variable Rate

This can vary from one lender to another and is the rate that most borrowers pay. It will rise and fall, broadly, in line with the changes to the Bank of England Base Rate. As a new borrower (whether purchasing or re-mortgaging), you can normally achieve a rate lower than the Standard Variable Rate but it is important to know what your payments would be at this rate because you may revert to it once your chosen deal draws to an end.

Fixed Rate

This option will set the rate for a specific period of time (most commonly between 2 and 5 years). Your payments will stay the same for this period despite what changed may occur to the lenders Standard Variable Rate.

Advantages

• Know exactly what you are paying every month - good for budgeting.
• You are safeguarded during the fixed period against the effects of interest rate rises.

Disadvantages

• If rates fall you will not benefit from the reductions.
• If rates rise sharply it could be quite a jump up to the Standard Variable Rate when the fixed rate ends.

Capped Rate

A variation of the Fixed Rate scheme. The rate can not go up but can go down if the lenders Standard Variable Rate falls below the level of the Capped Rate. This type of deal is more prevalent in a high interest-rate market place when the general feeling is that rates should fall. In this situation, borrowers are often concerned that mortgages are quite expensive. They are therefore naturally drawn towards the idea of fixing to avoid future increases jeopardising their financial security but would also like to benefit from the likely reduction in rates that could follow in the years to come. Capped rates therefore offer the perfect solution.

Advantages

• Security of a fixed rate with the benefit that rates could go down.

Disadvantages

• Usually a higher starting rate than fixed so you may find yourself paying more for the privilege of a rate that may (but may not) go down.
• Difficult to find a large supply of Capped rate products when interest rates are low (as they are currently) because the demand drops as borrowers become less concerned about the prospect of fixing into a mortgage that quickly becomes uncompetitive through swift and sizeable Standard Variable Rate reductions.

Discount

This option will give you a reduction against the Standard Variable Rate for a specific period of time. For example, if you were to obtain a 2% discount for 2 years and the lender had a Standard Variable Rate of 6.5%, your initial payments would be calculated against an interest rate of 4.5%. If the Standard Variable Rate reduced to 5% you would fall in line to 3%.

Advantages

• You are not taking a gamble on interest rates as with a fixed rate, you always know exactly how much you will be saving compared with other borrowers on the Standard Variable Rate.
• If Standard Variable Rate reduces, your mortgage payments will also reduce.

Disadvantages

• If Standard Variable Rate increases, your mortgage payments will also increase.
• Loss of control, more difficult to budget with than a Fixed Rate.

Tracker

This is a variation of a discount and works in exactly the same way except that the payment rate is following something other than the lenders Standard Variable Rate (usually the Bank of England Base Rate).

Advantages

• Any increase or decrease in the Bank of England rate is immediately passed on to borrowers. Sometimes, Bank rates fall by say, 0.5% and yet the lender only reduces their Standard Variable Rate by .25%. If you are on a discount rate you would only receive the .25% but tracker customers would get the whole .5%

Disadvantages

• Should rates rise you will quickly see your mortgage alter by the same amount whereas lenders can often defer making quick (or full) increases if they are waiting to see what happens in the market or feel that they will absorb some of the increase rather than pass it all on to the borrowers (although in reality this rarely occurs unless interest rates are exceptionally high and lenders are worried that an increase in costs will lead to bad-debt and repossessions).

Flexible Mortgages

Flexibility is a concept rather than a specific mortgage type. It is possible to have a fixed rate that is flexible or a discount that is flexible. There is no defined standard of what makes a mortgage product flexible. However, when seeking a flexible deal we would advise that you look for the following features.

• Interest calculated daily
• The ability to overpay the mortgage on a regular basis
• The ability to underpay the mortgage on a regular basis
• Able to make Lump sum payments
• Possibility of running a current account within the mortgage
• Ability to take payment holidays
• No early redemption penalties

Advantages

• More control over the mortgage and if used proactively, can dramatically reduce the number of years you have a debt. Excellent for people who are paid irregular salaries such as commission earners and the Self-Employed.

Disadvantages

• Flexible mortgages don't always have the cheapest rates so usually one needs to be in a position where overpayments are a reasonable certainty to get the most out of this type of product.

When helping you to choose what type of mortgage is best suited to your needs it is reassuring to know that we utilise software systems that can access over 3,000 different schemes! This market leading technology, coupled with our understanding of the industry and its products, ensures that we provide the advice most appropriate to your individual circumstances and requirements.

There are other factors to be taken into consideration when choosing a suitable deal which include:

• The cost of partially or fully redeeming your mortgage in the future.
• The initial set-up costs that the lender charges.
• Whether you are comfortable with the lender as a recognised brand-name
• How quickly the lender can produce a mortgage offer
• Whether the lender will advance money on the type of property you intend to buy
• Whether the lender insists on you purchasing their own home insurance.

Premier Financial Services will cover each step thoroughly with you so that you fully understand the options and are able to select the package most suitable to your needs. Contact our friendly staff today on 0118 9796687 for more advice.