Fixed rate mortgages are very straightforward. At the beginning of the mortgage agreement, the agreed interest rate is fixed and it then is applied throughout the term, or length, of the mortgage. A large proportion of fixed rate mortgages are arranged for a term of two or three years, although it’s possible to go for a longer time-span. The problem with fixing an interest rate for any longer than three years or so is that if you need to move before the end of the period, or you find a cheaper deal, a considerable early repayment charge could be implemented. If interest rates drop, you’re still left paying a higher rate than your neighbours with newer fixed rate loans or more flexible ones.
If you were equipped with a crystal ball you could avoid these pitfalls, but in the meantime you can only hope that rates will stay at the current level or higher – then you’ll be the one to gain. There’s a point to watch out for, though. The term of your mortgage can go by remarkably quickly. About six months before the end of your mortgage agreement, you need to look around for another deal. This may be with your current lenders or a new one, but if you don’t have another offer in place, you’ll be transferred to your lender’s SVR or standard variable rate – which will, in all probability, be in excess of what you’ve been paying.
There are several alternatives – too many to list, but one example would be an interest-only mortgage. Here you pay nothing – not a penny - off the actual debt, just interest on the loan for a set period. At the end of the term, historically speaking, your property should be worth a great deal more than you originally paid and you’re left with enough collateral to pay off the loan. No-one can know just what the property market is going to do, of course, but if you look back to what your property was worth some twenty years ago, the original amount you borrowed is going to look quite insignificant, compared to today’s value.
If you are open to some ups and downs, you could consider a Standard Variable Rate (SVR) mortgage. This is a very simple mortgage product linked to the base rate of the Bank of England – normally its interest rate is around two percentage points above base rate. The Bank of England rate can change at any time and lenders will broadly follow this. However there is nothing to enforce this and a rate reduction doesn’t automatically mean that your rate comes down immediately, and whilst lenders can be expected to follow this, they are not forced to do so. Almost certainly, when they rise, they’ll act much more quickly!
The way to be guaranteed that you can follow the base rate exactly is to take out a Tracker mortgage. The usual rate is up to a per cent above Bank of England base rate, which will be followed precisely. Some lenders specify that a minimum rate is applied, known as a “collar”, and the rate won’t fall below this, although many lenders have now dropped this stipulation.
There’s no need to worry about trawling through the options. The help you need is there on-line – an independent broker will do all the work for you and consider what you really need. They’ll search a very wide market to come up with some excellent options to find the right product for you.
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