Many people are worried about the economy. The word “recession” is being echoed across various media outlets, rightly or wrongly. In times like this, it’s easy to freeze. It is easy to put our plans on hold and wait the recession out rather than speaking to a mortgage broker about moving homes.
Buying your new home should be a time of excitement. By understanding what mortgages are available to you, you can select one with affordable repayments. You put the excitement back into homebuying and take control of your finances.
The mortgage products we are covering in this article are:
- Fixed-term mortgages
- Tracker mortgages
- Discount mortgages
What are the benefits of a fixed-term mortgage?
A Fixed-term mortgage is a mortgage where interest repayments are fixed for a set term. This can be for as short as one year or as long as 15 years. There are pros and cons to this, so you need to speak with a mortgage broker for professional advice.
One of the benefits of this product is you don’t have to worry about interest rates rising. Your rates are fixed, so even if repayments shoot from 3% to 6%, you’re safe. However, this is a double-edged sword. If you fix your interest rates at 5% for five years and realise in two years you can swap to 3%, then you’re stuck. (You would have the option of paying an early repayment charge to be able to move onto a new mortgage, but these can be costly.) This is another reason we recommend seeking the advice of a mortgage broker.
How does a tracker mortgage work?
A tracker mortgage is a mortgage that tracks the base rate. The base rate is set by The Bank of England, and it affects what interest rates lenders set. The amount you repay on a tracker mortgage can fluctuate each month depending on how the bank of England’s base rate changes. You can discover more about The Bank of England base rate here.
The benefits of a tracker mortgage are:
- Your interest repayments will drop if the Bank of England’s base rate drops
- A tracker mortgage typically has more affordable early repayment charges
- They’re a suitable option if you’re confident base rates will be low for an extended period
The disadvantages of a tracker mortgage are:
- Interest repayments increase if the base rate rises
- They can be unpredictable. Sometimes unexpected occurrences rock the economy (like a pandemic)
- Because your repayments can fluctuate, it is hard to create a monthly budget
Don’t gamble when selecting a tracker mortgage. Speak with a mortgage broker to ensure this product is right for you.
What is a discount mortgage?
A discount mortgage works in a similar way to a tracker mortgage. However, instead of tracking The Bank of England’s base rate, it tracks a lender’s SVR (standard variable rate). The way it works is a lender will tell you what their SVR is. Your interest repayments will then be based on a discounted version of the given SVR.
For example, let’s say a mortgage broker finds you a lender with an SVR of 5%. On a discounted mortgage, the lender offers you interest repayments of 3% a month, which is a 2% discount.
The benefits of a discount mortgage are your repayments can drop. If a lender’s SVR drops, then so do your mortgage repayments. They’re suitable for people who want a flexible mortgage which offers potential reductions.
Discounted mortgage repayments sound great, so why doesn’t everyone go for them? As much as these repayments can go down, they can also go up. And, because the SVR is set by the lender, the lender dictates whether they rise or fall. They don’t need to have a reason for this. Some lenders change their SVR even when The Bank of England hasn’t altered its base rate.
Get Expert Advice from a Mortgage Broker
You can’t take a one size fits all approach to mortgages. Different products have different benefits. The key is to speak with a professional who can advise you on which one is going to be the most beneficial for you. This will depend on a variety of things, like your financial circumstances and monthly income.
We offer a free initial consultation to anyone who is debating making their next move. This consultation is about more than helping you make a decision which will financially benefit you for years to come. It’s about opening your doors to mortgage products that will allow you to buy your dream home.
Book your free initial consultation by clicking here to contact us.
