Mortgages/Finance

Introduction

Regardless of the mortgage you are applying for, there are a multitude of different interest rate options available.

Standard Variable Rate (SVR)

This will be the lender’s underlying rate that will typically apply at the end of an initial interest rate period. Alternatively, it can apply from the outset, although this is only usually so for further advances rather than the main mortgage account as the rate is commonly quite high. An average SVR will be around 2% above Bank of England (BoE) base rate for banks and marginally less for building societies. The main advantage of a mortgage charged at SVR will be the generally low level of fees and the fact that it will usually be free of any redemption penalties.

As the name suggests, the rate is variable and whilst it may not be directly linked to the BoE base rate, it will fluctuate as the base rate is increased or decreased.

Discounted

Linked to the lender’s SVR, a discount will apply for a specific period from inception. This is a market that is aggressively competed in by lenders and as such some very attractive deals are usually available. Similar to the SVR mortgage, this is variable in cost and can increase or decrease, thus due care must be taken to ensure affordability remains if interest rates were to rise.

Tracker

Again this is a variable mortgage, which can fluctuate, however, unlike the SVR and discounted mortgages, this type of rate is explicitly linked to the BoE base rate. A tracker can be linked to this for the duration or for a shorter period, reverting thereafter to the SVR.

Fixed

This type of mortgage offers the benefit of a fixed interest rate for a specific period. This offers two key benefits. The first is a pre-determined monthly outgoing, which is ideal for those working to a budget. The second is that it provides a hedge against interest rates rising in the future, which if applied to your mortgage, would result in the monthly instalments becoming uncomfortable or altogether unaffordable.

Capped

In the ideal world, this type of mortgage seems to be ideal, offering the benefits of rate reductions if rates diminish but with the upside that if interest rates increase, the upper ceiling or cap comes into play to prevent cost spiralling out of control.

However, if a capped rate were too low, which would seem to be a benefit, in effect it becomes a fixed rate, as the rate is unlikely to reduce below that rate. In that instance, when compared directly with fixed rates, they tend to be uncompetitive. If the rate is too high, the cap is unlikely to come into play and thus it becomes a variable rate mortgage. When compared against these, they again tend to be uncompetitive.

Because of these issues, capped rate mortgages are neither widely available nor popular.

Hybrid

A small number of mortgages are available which combine both a fixed rate and discounted/tracker rate, with one following the other. These may seem ideal at the outset, but unlike other single type mortgages, not only are you trying to gauge one interest rate cycle but instead two. Because of this they are not overly popular.

Cashback

This is typically a SVR linked mortgage, the benefit being that a lump sum is payable to the applicants upon completion. Because of the not insubstantial benefit initially, usually expressed as a percentage of the advance, the lender will apply redemption penalties usually for a period of 5 years or more.