With each monthly mortgage payment, part of the money goes towards the interest charged by your lender and the other part towards repaying the money you've borrowed the capital. If your monthly payments increased because of a rise in the Bank of England base rate, the extra money you paid would only cover the increased interest charges - so you'd be paying more each month without actually clearing a greater proportion of your mortgage debt.
Often, a tracker mortgage will be tied to an external factor such as the base rate for a set period usually two or five years , before reverting to the lender's standard variable rate. Longer-term tracker mortgages also tend to come with higher rates than those with shorter deal periods. Your interest rate will never drop below the collar, even if the base rate falls dramatically. For instance, if you were on a deal that meant you were paying the base rate plus 0. Moneyfacts research in August found that nearly one in 10 tracker mortgages had a collar.
Nearly all of these collars were set at the initial rate, meaning your interest rate would only ever be the same as or higher than it was at the start. If your deal has a cap your interest rate will not go above it, regardless of whether the base rate exceeds it, for the duration of the cap usually two or five years. Deals offering a cap tend to have higher initial rates, as you're paying for the security a cap offers. The average initial rate for a tracker mortgage, across all deal lengths, was 2.
Two-year deals vastly outnumber other deals, and the increased competition between lenders means that you can also get the lowest rate by opting for a two-year product. Tracker mortgage deals usually offer the introductory rate for a limited timeframe.
The longer your interest rate tracks the Bank of England base rate, the higher the interest rate tends to be. When the introductory deal period comes to an end, your lender will usually transfer you onto its standard variable rate SVR. Typically this will be a higher interest rate, which means that your monthly repayments will increase.
For example, in July , the average initial rate for a two-year tracker mortgage was 2. For this reason, it usually makes sense to switch deals by remortgaging at the end of your introductory deal period.
Variable-rate mortgages including trackers are often cheaper than fixed-rate mortgages. This is because, with a fixed rate, you generally pay extra for the security of knowing what your interest rate will be for the duration of the deal. When we checked in July , the average initial rate for a two-year tracker mortgage was 2. For a two-year fixed-rate mortgage it was 2. But if you factor in a possible rise in the base rate, a tracker mortgage can become more expensive than a fixed-rate deal.
So a tracker mortgage that seems cheap now could cost more in the long term. On the other hand, fixed-rate mortgages will nearly always carry an early repayment charge ERC , meaning you have to pay a hefty fee to exit the mortgage before the end of the initial deal period. Some tracker mortgages are available without ERCs, so if you're planning to move house in the next couple of years, or you want a cheap rate now with the option of remortgaging if the base rate goes up, this might be the mortgage type for you.
A tracker mortgage could be suitable if you think the base rate will fall or stay low. A tracker mortgage can offer more flexibility than a fixed-rate mortgage. This flexibility means being able to pay your mortgage off early by overpaying, changing your mortgage to another lender, or switching to another product with your existing lender, often without having to pay an early repayment charge ERC.
If you prefer this kind of flexibility, and can afford higher payments if the base rate rises, a tracker mortgage may appeal to you. Our mortgage interest calculator can help you work out whether you could afford higher payments if the base rate went up. Financial Services Limited. Which mortgage is right for you? Is it better to fix or not to fix? Read our guide to find out whether a fixed rate mortgage or a variable rate mortgage is best for you.
Understanding the key features of a fixed rate mortgage and a variable mortgage can be fairly straightforward, but deciding between the two and picking one that saves you money is much trickier. Compare fixed rate mortgages if you're remortgaging, a first-time buyer, looking for a buy-to-let or moving home. Whilst there are a number of different mortgages available, there are two main types of mortgage deal to choose from: fixed rate and variable rate mortgages.
Fixed rate mortgages fix your interest rate for an agreed period of time, laying out how much you will have to pay each month over the fixed period.
Fixed rates are not affected by the Bank of England and will not change during the agreed period. Most fixed rate mortgages lock borrowers into the agreement with a high penalty fee if you wish to repay the mortgage before the fixed term expires. The inflexibility of a fixed rate mortgage is the price you pay for guaranteeing the rate and allowing you to budget accordingly.
Lenders usually work out the fixed rate you will pay by estimating how interest rates will change over the set period. Fixed rates can be helpful for certainty and allow you to budget as you know exactly how much you will pay each month.
In contrast, variable mortgages move up and down depending on the movement of the Bank of England base rate. Variable rates fall into three categories, which each have slightly different features: tracker rates, standard variable rates SVRs and discount rates. Tracker mortgages are a form of variable rate mortgage, which differ from standard variable rate mortgages.
With a standard variable rate mortgage, each mortgage lender can essentially change the rate to whatever it likes. However, the likelihood of a mortgage lender setting the variable rate to something astronomically high is going to be limited by competitive pressure, public scrutiny and negative press. Tracker mortgages follow the base rate set by the Bank of England , meaning the rate on repayments will move with UK rates, however the mortgage lender will usually charge a percentage point or two more.
Standard variable rate mortgages generally follow the same principle as a tracker mortgage, but the decision as to what rate to offer ultimately comes down to the mortgage lender. There are also discounted versions of tracker mortgages and standard variable mortgages. Generally, these mortgages include a discount on the tracker or standard variable rate for a set period of time.
Taking out a mortgage can be a very stressful and nerve-wracking time. You can compare fixed rates and variable rates on bonkers. Mortgages Mortgage interest rates explained Available languages. Daragh Cassidy. But do you know the difference between the various types of mortgage rates on offer? What are variable rates? There are a few different types of variable rate to consider: 1. Tracker variable rate Similar to a standard variable rate, tracker variable rates are linked to the ECB.
Capped rate A capped rate is exactly what it sounds like. Discounted rate Discounted rates are temporary and are usually offered as incentives to new customers. What are fixed rates? What are split rates? Which rate type is best for you?
0コメント