To save money in the long-term?
If you are on a Standard Variable Rate mortgage, it is wise to carefully consider if this is the best product. Unless you seek the top level of flexibility regarding your mortgage, then a Fixed Rate mortgage could save you money. Here we look at a comparison so you can see the facts and figures.
This article does not constitute advice.
Professional advice should be taken prior to acting on any part of it.
Your property may be at risk should you be unable to maintain any agreed mortgage payments over the term agreed.
Standard Variable Rate Mortgages
Often homeowners that fail to plan their finances or keep track of their mortgage value effectively, end up on their lenders’s Standard Variable Rate (SVR).
Lenders make special offers available in the hope that when they finish, you will forget to move your mortgage and pay the higher rates in their SVR’s.
That said, right now, with the Bank of England (BoE) base rate being so low, it is understandable why some borrowers choose a SVR or a Tracker mortgage, enabling low rates and more flexibility.
An SVR moves broadly in line with the BoE base rate, however, the lender dictates the rate so they are not obliged to pass on cuts as they occur.
Subsequently, lenders frequently shortchange their customers by only passing on part of a BoE rate cut. For example, they may cut their SVR by 0.2 percent, when the rate cut was 0.25 percent.
Therefore, overall, rates tend not to be competitive when comparing to what else is on the market.
Tracker Mortgages
Tracker mortgages have the advantage that you will reap the full reward of a cut in the BoE base rate. However, the pain is also felt if the rates increase. This is because a Tracker mortgage wholly tracks the rate set by the BoE, rather than with a SVR that is set by the lender.
Some borrowers on Tracker mortgages experienced zero interest recently, as lenders had offered deals for below the base rate, for example 0.5 percent below base rate.
As a consequence though, Tracker rates have more recently been raised by lenders to account for the low interest rates, and most deals on the market are 2 percent above the base rate (or higher), as the lenders need to protect their position too.
This may sound like a good rate, however, if the BoE rate rises, so will your Tracker.
If opting for a Tracker, try to find one with no early redemption charges, so it is possible to switch if the BoE base rate starts to creep upwards again.
Fixed Rate Mortgages
Fixed Rate Mortgages still offer the combination of low rates for a longer term, which gives homeowners that like to plan their finances, more security.
Even though the BoE base rate is low, it doesn’t mean your SVR will be low. It is vital that you know the rate you are paying for your mortgage – after all, it is likely to be your largest monthly payment.
This product by Barclays shows an example of potential savings on a £200,000 loan, when comparing a Fixed Rate Product with the lender’s SVR.
Barclays is of course just one lender. Others offer similar products. Work with a mortgage adviser to ensure you are choosing the best lender, and product, for your needs.
Ultimately though, if you are on an SVR mortgage, it is worth an assessment as there could be an opportunity to save money each month by moving to a more suitable product.
Get a mortgage review with Chris
If you would like us to undertake a review of your current mortgage deal or you are thinking of purchasing in the near future and require funding, please contact Chris for a free, no obligation appraisal.
Tel: 01403 780 770
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