Best Mortgage

You found the perfect property and now is time to choose the best mortgage on the market. With so many types and deals around which one will fit your circumstances? In the next few lines we are going through some of the most common types of mortgages in the market:

The Standard Variable Rate Mortgage:

The standard Variable rate mortgage has for years been the most common product available. In recent years has been challenged by a number of other options and is now less in demand. Even borrowers that have remortgaged recently have changed to a more beneficial product and in response to changes in the economic market and rates in general. Its name suggest exactly what is does. It’s a product that has a rate that fluctuates with interest rates in general. If the Bank of England increases or decreases the Base Rate then the rate of this mortgage will change accordingly.
Someone who is looking for a straightforward product and easy to understand, this is an option to bear in mind. However, consult your adviser to see it fits your circumstances.

Fixed Rate

The market for fixed rate mortgages is highly competitive. Very attractive fixed rates are usually on offer to tempt borrowers to remortgage from their existing lenders. How can lenders afford to offer these competitive fixed rate products? It would seem that there is little or no profit to be gained, although a substantial number of new mortgage applications may well be received, thus encouraging asset growth.
The answer is that the rate to be charged is linked to the rate paid by the lender on a tranche of funds raised on the wholesale money markets. If a lender raises £1OO m from the market at a fixed rate of 4.8% over a four-year period, then this amount may be made available to new borrowers in the form of a four-year fixed rate mortgage at 5.2%. Once the £1OO m has been lent, the product will be withdrawn and possibly replaced with a new product at an interest rate linked to the prevailing money market rates at that time.
Benefits
The main benefits of a fixed rate mortgage to the borrower are obvious in that it helps him to budget. He will know exactly what his monthly payment will be for a given period of time, and will be protected against interest rate increases during that period.
The discounted rate mortgage
This type of mortgage simply offers a discount off the lenders standard variable rate for a given period and is designed to attract new mortgage business in the same way as a fixed rate product.
Some discounted mortgage products offer what is known as a ‘stepped discount’. For example, the discount may be 1.0% in the first year, 1.25% in the second year and 1.5% in the third year. This is designed to give further encouragement to the borrower not to move his mortgage elsewhere before the discounted period ends.
As with the fixed rate mortgage, there are certain matters that need to be taken into consideration when a discounted rate mortgage is being contemplated.

The capped rate mortgage

This is a variable rate mortgage that benefits the borrower in two ways:
- the borrower’s mortgage will follow the lender’s variable rate up to a certain level (the capped rate) for a specified period. The payable rate may include a small premium over the lender’s SVR – it could, for example be the SVR plus 0.25%;
- where the lender’s rate moves above the cap, the borrower will pay the capped rate. In other words, there is a limit (cap) on the rate the borrower will pay. This means advantage can be taken of all reductions in the lender’s standard variable rate whilst at the same time the borrower knows the maximum he will pay;
- there is likely to be an arrangement fee payable;
- there will probably be an early repayment charge on redemption during the capped period (and sometimes for a period afterwards);
- there may be a requirement for the compulsory purchase of an associated insurance product.
Although not common at the moment due to low interest rates, some capped mortgages come with a ‘collar’. This represents the minimum interest rate payable during the term. In this way the lender sets an upper and lower limit to the interest payable. For example, a mortgage with a 7% cap and a 3% collar would allow the rate to vary within those limits, but if rates went above 7% the borrower would pay 7% and if they went below 3% he would pay 3%.
A capped mortgage will be worth consideration by somebody who feels that interest rates are about to rise, but still wants the security of knowing the maximum payment, although the differential between the lender’s standard variable rate and the capped rate will be an important consideration.

The tracker mortgage

This is also a variable rate mortgage. The rate charged follows the Bank of England Base Rate (BOEBR) for a given period that may be up to ten years. The rate charged may be a fixed percentage above the BOEBR for the entire period or may actually be a fixed discount off the BOEBR for a given period, followed by a fixed percentage above for the remaining term. For example, the interest rate charged on a five-year Base Rate tracker mortgage might be BOEBR – 0.25% for the first year, then BOEBR + 0.5% for the remaining four years.

The main advantages of a Base Rate tracker mortgage are:
- there is a guarantee that the interest rate charged will be reduced immediately following a reduction in the BOEBR, irrespective of whether the lender reduces its standard variable rate – - lenders do not always reduce their standard variable rate in response to a cut in the BOEBR.
- the interest rate charged is likely to be substantially lower than the lender’s standard variable rate simply because the BOEBR is usually between 1% to 1.5% lower than the average standard variable rate charged by lenders.
There may be occasions when a lender will make a small reduction in its standard variable rate even though the BOEBR has not been reduced. In these circumstances borrowers with a Base Rate tracker mortgage with that lender are unlikely to have their rate reduced.
Many Base Rate tracker mortgages require an arrangement fee to be paid and impose an early repayment charge on full or part redemption within a specified period. In addition, the compulsory purchase of an associated insurance product may also be required.

The flexible mortgage

The flexible mortgage is a recent innovation in the UK. It is difficult to actually define a flexible mortgage because it can be almost anything a particular lender wants it to be. However, to be classed as a flexible mortgage a product must incorporate the following three basic features:
- interest calculated on a daily basis;
- the facility to make overpayments at any time without incurring a penalty, and to underpay if the borrower’s circumstances warrant it;
- the facility to take a payment holiday, again if circumstances warrant it.
The lender would normally set parameters for underpayments and repayment holidays, although these might be able to be re-negotiated in certain circumstances. Many flexible mortgages offer far more than the basic features described above. It is common for the borrower to be provided with a chequebook to take advantage of a drawdown facility. This enables additional amounts to be borrowed and debited to the mortgage account as further advances.
The lender will set a limit on the total borrowing and, if this is exceeded, cheques are likely to be refused for payment, with no further chequebook being issued until the outstanding balance has been reduced to the required level.
This facility is much easier, administratively, than the normal method of dealing with further advances. The wording of the mortgage deed used for this type of product is such that all further advances will automatically take priority over any other charges registered against the property Hence, the need for a subsequent mortgagee to postpone its charge in favour of the further advance is eliminated.
In addition to the draw down facility, some lenders now offer a range of other benefits that has resulted in a particular kind of flexible mortgage, popularly called a current account mortgage.
The most important feature of a current account mortgage is the ability for it to receive salary payments and pay direct debits and standing orders m exactly the same way as a current bank account.

Offset mortgages

An offset mortgage is similar in most ways to a flexible mortgage. The main difference is that the account holder’s mortgage and savings are held in the one account. The savings held in the account are ‘offset’ against the mortgage, which means that interest is only paid on the balance. The savings are not tied into the account and can be taken out at any time.
Take this example:

The mortgage is £100,000
Savings are £10,000

Interest rates are 6% on the mortgage and 3.5% on a ‘normal’ savings account. The savings of £10,000 would be offset against the mortgage of £100,000, leaving a balance of £90,000 on which Interest would be charged. Interest would be £450 per month. While no interest would paid on the £ 10,000 savings, the borrower would have saved £50 each month on the mortgage. Had the savings been held in a savings account at 3.5% gross, the account holder would have received £29 before tax; after basic rate tax it would be worth £23.20. Offsetting the savings against the mortgage has saved £27 a month. While an offset mortgage sounds like a good idea, it is really of value only to those who will be able to maintain a significant and consistent level of savings in the account
Even more sophisticated and complex offset mortgages are now becoming available. These enable a borrower to offset interest payable on various savings accounts against the interest charged on his mortgage and other secured and unsecured loans held with the lender.