Blog written 01/08/2023
There are different mortgage products types to consider when taking out a mortgage. Which product we recommend would be dependent on your individual circumstances. This blog explains each product type in detail.
Mortgage Product Types: Fixed Rate of Interest (Provides certainty):
This product has a fixed interest rate for a pre-set period of time. You can fix the interest rate for a short period of time such as 2 or 3 years, or for a longer period of time such as 5 or 10 years. A fixed rate product will tie you in with exit charges for the period of the fixed rate. You can still exit a fixed rate early but you would have to pay an exit fee called an Early Repayment Charge.
Most early repayment charges are calculated as a percentage of the remaining balance at the time you exit. For example, a 2 year fixed. Could have an early repayment charge of 2% of the balance in year one of the fixed rate and 1% of the balance in year two of the fixed rate. So if you wanted to exit the deal in year two and your balance was £100,000, the early repayment charge would be £1,000. Full details of these charges can be found in your mortgage offer.
This type of product is aimed at people that like the certainty of knowing exactly what they need to pay each month. This product is also good for people who have a strict budget for their mortgage payment for a period of time such as someone who, has nursery costs for a few years so their household budget is high for a period.
Advantages of a fixed rate:
If interest rates rise, you will not be affected as you have secured your interest rate for a set period of time.
Your monthly mortgage payments are fixed for a set period allowing you to budget effectively.
Disadvantages of a fixed rate:
If interest rates fall, you will not benefit as you have secured your interest rate for a set period. You will have to pay an exit charge if you want to leave the fixed rate early.
Mortgage Product Types: Variable Rate of Interest (No certainty):
This product has an interest rate that can go up & down. This means that your mortgage payments can change from month to month.
This type of product is aimed at people who want to benefit from interest rate reductions and those who have surplus income and can afford to take the risk that their payments may increase. This type of product may also suit someone who doesn’t want to be locked into a product with exit penalties. As some of these products do not have any early repayment charges.
There are 3 main types of variable rate products, as follows:
Mortgage Product Types: Discounted:
A discounted product has an interest rate set at a certain level below the lender’s standard variable rate (SVR) for a certain period of time. For example, if the discount is 1% below the SVR for 2 years, and the SVR is 7%, the interest rate charged would be 6%. This type of product can still fluctuate, as the lender can decide to change their SVR at any time. The discount stays the same for a set period.
Some of these products have an Early Repayment Charge if you exit the deal during the discounted period.
Mortgage Product Types: Tracker:
A tracker product has an interest rate set at a certain level above the Bank of England Base Rate for a certain amount of time. For example, if the tracker is 0.5% above the Base Rate for 2 years, and the Base Rate is 5%, the interest rate charged would be 5.5%. This type of product will change in line with the Base Rate but the percentage you are charged above the Base Rate will stay the same for a set period.
Some of these products have an Early Repayment Charge if you exit the deal during the tracker period.
Mortgage Product Types: Standard Variable Rate:
A standard variable rate (SVR) is an interest rate set by the lender. It is the default interest rate that mortgage customers are moved onto once a promotional product ends. Some lenders will allow you to borrow money on their Standard Variable Rate such as an existing mortgage customer who needs to borrow additional money for home improvements.
If you are on the Standard Variable Rate you will not be tied in with early repayment charges. The lender has control over their own variable rate and it can be changed at any time.
Advantages of a variable rate:
If the Standard Variable Rate or Bank of England Base Rate reduces, so will the interest rate you are charged. A lower interest rate will reduce your mortgage payment. This product allows you to take advantage of rate reductions.
Some of these products do not charge you if you want to leave early.
Disadvantages of a variable rate:
If the Standard Variable Rate or Bank of England Base Rate increases, so will the interest rate you are charged. A higher charged interest will increase your mortgage payment.
There is no cap on how high your interest rate can go.
Some of these products will charge you if you want to leave early.
The key to choosing the right product:
Get expert advice. Because we have a detailed conversation with our clients to ensure they end up with a mortgage product that suits them. Make sure you are open & honest with your adviser about any future plans such as starting a family or moving house.
If you would like to book a meeting with one of our advisers, you can contact us by clicking here.
Your home may be repossessed if you do not keep up repayments on your mortgage.
The information contained within this blog was correct at the time of publication (01/08/2023), and is subject to change.