Finding a good mortgage deal can be hard work if you don’t know what you’re looking for. There are a wide variety of options out there including fixed, tracker and discount mortgages, how do you know which deal is best for you? This article takes a look at the basics and helps you to make a decision when looking for a mortgage or remortgage.
Different types of mortgage
There are three main types of mortgage which we will look at, tracker, fixed and discount.
Tracker Mortgages – These have their interest rate linked to the base rate from the Bank of England. At the time of writing, this is 0.5% and has been this way for over six years now. There is a mixed opinion as to when this will change but many analysts believe next year or the year after we will see a rise in this base rate. With a tracker mortgage, once the base rate rises, so do your mortgage repayments. In essence, have a tracker mortgage is a minor gamble and could see your monthly repayments increasing if the base rate were to change.
With this in mind, a lot of mortgage terms are for 2 years. At this point you are entitled to change your mortgage to a different product or a different lender all together. This mitigates the risk somewhat, because if the base rate does rise, you will only have a certain amount of time left until you can change your mortgage deal.
Discount Mortgages – These work in a similar way to tracker mortgages, however, the interest rate is not linked to the base rate of the Bank of England, instead, it is fixed to the lenders base rate. The problem with this is that the lender can change it at any time and usually without warning. This means you are in essence taking a chance with your monthly repayments and could find your bills creeping up. On the flip side, if the lender were to reduce their base rate, your repayments would go down.
Fixed Mortgages – These have their interest rate fixed for the entire mortgage period. If the Bank of England base rate changes, these will remain the same. The advantages to fixed mortgages is that you know exactly how much you will be paying each month and can budget accordingly. Some lenders are currently offering very low interest rates, especially if you have a decent amount of deposit available. If budgeting is important to you and you don’t like fluctuations in your monthly bills, then a fixed mortgage is a good idea.
In summary, tracker and discount mortgages bring a certain amount of uncertainty with them. They can be viable in the short term, but if rates are increased, your repayments will go up. With a fixed mortgage, you are in total control of how much you pay throughout the mortgage term length.