Thrifty Loans

There are many different types of mortgage available in the UK market. Let’s see what they are all about.

Standard Variable Rate
Often shortened to SVR, this pretty much says what it is. It the standard rate offered by the lender and it can vary because essentially it is linked to the Bank of England base rate. So, whenever the Bank’s base rate goes up, so does the SVR. But financial institutions don’t set the SVR AT the Bank’s base rate. No, an SVR is usually at least 1% and more like 2% higher. That makes SVRs expensive, and most people don’t choose to have an SVR when they take out a mortgage. But it is the rate your mortgage will be switched to when your period of offer (be it fixed, discounted etc) ends. That makes is sensible to think about re-mortgaging a few months ahead of the scheduled date so you can hopefully get a better mortgage deal. Of course, you will need to make sure that by doing so, you won’t incur an early redemption penalty.

Fixed Rate
This type of mortgage has the interest rate fixed for a set period of time. Usual periods are two, three of five years. Until the deal runs out your mortgage repayments will be the same every month, irrespective of what the Bank’s rate is doing. This can be an attractive option with a tight budget and gives the security of knowing what your payments will be. It is popular with first-time buyers who often are on a tight budget. It is also a good choice if interest rates look a little unpredictable – or might go up! Of course, if the base interest rate should go down, you might end up paying more with a fixed rate mortgage. Things to look out for are the length of the fixed rate period and what happens after that – you’ll probably be switched to the SVR. And if you want to change your mortgage before the fixed period ends, will there be an early redemption penalty – and what will it be?

Offset Mortgage
Still fairly new to the UK market, the idea of offset mortgages is to take advantage of the fact that there is less interest from savings than is taken away for debts. Thus, your savings account is linked to your mortgage account, and your savings amount is use to reduce the balance of your mortgage. For example, if you have a £120,000 mortgage and £12,000 in savings, you would only pay mortgage interest on £108,000. And if you pay higher rate tax, you won’t have to pay it on the lost amount. Using simple numbers, £10,000 in savings would earn 5% interest: £500 gross; £400 for a lower rate tax payer and £300 if you pay higher tax. Over ten years a low rate tax payer would gain £4,802 and the higher payer would net £3,439. Now if you have a £100,000 mortgage at 6%, the interest would be £33,224 over ten years. If you used the £10,000 to offset the mortgage, you would pay only £19,902 interest (on £90,000). That’s a saving of £13,322 which compares very favourably with the interest on savings you would have made. Offset mortgages can be good if you’ve got good savings and won’t need them. Not surprisingly there is a bit of a catch: offset mortgages have higher interest rates than most fixed rates, but competition is forcing them down.

Discounted mortgages
These give a discount on the lender’s SVR. As an example, a lender’s SVR might be 7.5%, but the discounted rate 2% lower at 5.5% for two years. Discounted rate mortgages follow the SVR so they are variable, going up and down with the SVR, but lower. Look out for the length of the discount, and avoid tie-ins.

Tracker mortgages
These track the Bank of England base rate rather than the lender’s SVR. They are obviously set above the Bank’s rate and follow it to the day, up or down. Look out for the length of the track – usually 2, 5 or 10 years.

Capped rate mortgages
For a set period the mortgage will move like a discounted mortgage, but there is an upper cap over a set period. This gives a limit on how much your mortgage goes up, but it can come down as much as it likes! Rates, of course, tend to be higher than regular fixed and discounted mortgages.

Flexible mortgages
These allow you to vary your payments, which can be handy if your income fluctuates. They enable you to overpay when you can, or underpay when cash is tight. Overpaying can save you quite a bit of money in the long term, so can be worthwhile if you can afford it.

On all mortgage types be wary of extended tie-in. This means that the redemption penalty is payable even after your discounted, fixed etc period is over, and by then you’ll probably be on the lender’s SVR. Very bad.

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