Standard Variable Rate Mortgages
Standard Variable Rate or SVR is a type of mortgage where the interest rate can change, influenced by the Bank of England’s base rate. Each bank sets its own standard variable interest rate which is usually a couple of percentage points higher than the Bank of England’s base rate. SVR is one of the more common type of mortgages available with many leading lenders offering at least one, and sometimes offering several with different rates and terms to choose from.
You are most likely to continue onto this type of mortgage after finishing a Fixed Rate, Tracker or Discount Mortgage.
A lender can raise or lower its SVR at any time and, as a borrower, you have no control over what happens to it.
An advantage of this type of mortgage is that you are generally free to make overpayments or switch to another mortgage deal at any time without having to pay a penalty charge. Another benefit is that the interest rate will usually go down if the Bank of England’s base rate goes down. The disadvantage is that the rate can increase at any time and this is worrying if you are on a tight budget. The lender is free to increase the rate at any time, even if the Bank of England’s base rate does not go up.
Fixed Rate Mortgages
A fixed rate mortgage means that the rate of interest is fixed for the duration of the deal. Fixed rate mortgages are suitable for those who want to budget and prefer to know exactly what their monthly outgoings will be. You do not have to worry about general increases in interest rates, and can be safe in the knowledge that your payments will not go up during the fixed rate period. An early repayment charge may apply if the mortgage is repaid during the fixed period.
In addition to Standard Variable Rate and Fixed Rate Mortgages there are a few other kinds you may wish to consider before picking the right one for you. You could even combine a few of the options.
Discount Variable Mortgages
Basically a Discount Mortgage offers an introductory deal. This type of loan is cheaper than the Standard Variable Rate at the start of your mortgage. It allows you to take advantage of a discount for a set period of time at the beginning of your mortgage, usually the first 2 or 3 years. When the set period comes to an end the interest rate will be higher than the Standard Variable Rate.
The introductory discounted rate is variable as is the rate that follows it so be aware that, just the same as a Standard Variable Rate Mortgage, the amount you pay is likely to change in line with the Bank of England’s base rate during the duration of the mortgage. Also be aware that the discount offered at the beginning may be very good but you need to look at the overall rate being offered.
An early repayment charge may apply if the mortgage is repaid during the discount period.
With a Tracker Mortgage the interest rate is linked solely to the Bank of England’s base rate. If the Bank of England’s base rate goes up then so will the rate of interest you have to pay. If the Bank of England’s base rate falls then your monthly repayments will go down. By comparison the interest rate on a Standard Variable Rate Mortgage is similarly linked to the Bank of England’s base rate but it can also be changed by the mortgage lender whenever they wish to do so and for whatever reason. With a Tracker Mortgage you are guaranteed that the rate will only track the rate of the Bank of England and not be influenced by any other factors.
This type of mortgage is designed to accommodate your changing financial needs. It may allow you to overpay, underpay or even take payment holidays. You may also be able to make penalty-free lump sum repayments. If you make overpayments you may also be able to borrow back. However, to enable all this flexibility it is only to be expected that the interest rates charged on Flexible Mortgages are going to be higher than for most other repayment mortgages.
Capped Rate Mortgages
Capped Rate Mortgages, similar to Standard Variable Rate Mortgages, offer you a variable rate of interest. The difference is that your rate will have a cap. This guarantees that the rate will not go above a certain amount.
It sound like a great deal but there is a downside. The bank will start the mortgage on a higher interest rate than the normal standard variable rate or fixed rate. This is to cover the bank in case future interest rates rise above the rate they have capped for you.
Also caps tend to be quite high so it is unlikely that the Bank of England’s base rate would go above it during the term of the mortgage.
As the bank is able to adjust the rate on this mortgage at any time up to the level of the cap it is best to think of the cap as the maximum amount you might have to pay each month.
Offset Mortgages are sometimes known as Current Account Mortgages. They link your bank account to your mortgage. If you have savings they will go towards the balance of the mortgage. For example, if you have £20,000 in savings and a mortgage of £200,000 you will have to pay interest on the balance of £180,000. You won’t receive any interest on your £20,000 savings but you will not have to pay interest on £20,000 of your mortgage.
Some Offset Mortgages link only to your current account, while others link to both your current account and savings accounts. Offset Mortgages are available on fixed rate deals or a range of variable rate offers too.