Fixed Rate

If you want complete certainty over your mortgage payment outgoings for a while, a fixed-rate mortgage will give you exactly that. Once the loan is activated, your monthly repayments will stay exactly the same for a set period, generally between one and five years, but occasionally for longer. Ten-year products have become more common and, with interest rates at an all-time low, many people are locking in a competitive rate.

However, fixed-rate mortgages come with higher application fees and a penalty for repaying any of the loan early before the fixed-rate period ends. They require a degree of certainty from you that you will either retain the property for that long or take the mortgage with you to your next purchase.

If you plan the home you are buying to be your forever home, perhaps to raise a family long-term, or simply like the idea of payment security, then a fixed rate could well be a good option for you. If you like the idea but feel you might want a bit more flexibility, then choose a fixed rate with a shorter term, perhaps a year or two.

Right now, almost everyone is choosing a fixed-rate mortgage taking advantage of interest rates at their lowest in the past 50 years!

Capped Rate

Capped rate mortgages are a type of variable rate mortgage, but with one important difference: they have an interest rate ceiling, or cap, beyond which your payments can’t rise. For example, if the cap were set at 4%, that would be the highest you would pay no matter how high the lender’s Standard Variable Rate rose. And if interest rates dropped, your repayments would follow suit

A capped rate is normally only for an introductory period – typically anything from two to five years.

When the trajectory of interest rates is upwards, a capped rate can offer you the certainty that your payments will never go above a certain level. However, there are currently very few products available and, with fixed rates so low, there’s little point in taking out a capped rate anyway.

Tracker & Discount Rates

Tracker rates

Many people found themselves in a positive financial position with their tracker mortgage when the Bank of England reduced its base rate to historically low levels. Some borrowers were lucky enough to end up paying zero interest, while some lenders changed their terms to ensure they weren’t out of pocket.

The base rate is the interest rate that banks and lenders pay when they borrow from the Bank of England … It influences most interest rates, including savings accounts, credit cards, loans and mortgages.

A tracker rate follows the Bank of England base rate but is set on either side (above or below) depending on whether interest rates are high or low. Right now, trackers are set slightly above the base rate and generally higher than fixed rates, which means there’s not much reason to take one out because the only way for rates to go is up.

Discount rates

A discount rate mortgage works on the same principle as a tracker rate, but instead of following the Bank of England base rate, it follows your lender’s Standard Variable Rate (SVR).

You might find that the discount is a better initial offer than a tracker, but your mortgage rate will be led by your lender’s financial considerations, not by the Bank of England. Lenders have shown that they don’t always reduce their rates whenever the BoE base rate drops.

If your view was that interest rates were about to go down, you might choose a discount or tracker rate, but I can’t remember the last time someone took one out and very few discount or tracker products are even currently available. When interest rates do eventually rise again, you’ll see more tracker and discount rates being released as they become more attractive to both lenders and borrowers.

Variable Rate

A variable-rate mortgage changes in line with the lender’s Standard Variable Rate, often guided by the Bank of England’s base rate. So, whatever the ups and downs of interest rates – which are led by the economy – your mortgage will follow a similar course.

Does that mean constant uncertainty for the whole term of your loan? Not necessarily, because interest rates don’t tend to jump about wildly from month to month. Nonetheless, your rate could change at any moment.

So why would you consider a variable rate? Well, the key sell is lower upfront fees combined with increased flexibility.

Although your mortgage lender might not love your idea, if you only planned to keep a property for a very short time, or you simply weren’t sure of your future plans, a variable rate would let you sell up and pay back the entire amount with no early repayment penalty.

And if you ever wanted to switch to another product with the same or a different lender, you could change without incurring any fees. It offers complete flexibility and is mainly only ever taken when you know you won’t be having the mortgage for very long (whatever the reason).

Final words

Although we’ve explained the differences between the types of mortgage interest rates and why you might choose one over another, not every product in any category is right or available for everyone.

Lenders all have their peculiar criteria over who they prefer as borrowers, so why not book an appointment to chat about your plans with one of our advisers? We can help you identify exactly the right mortgage product that offers whatever certainty or flexibility you need.

Call us on 01273 906706 or email enquiries@sussexmortgageservices.co.uk to fix a time.