Transcript

NARRATOR

In this video, we explore the most popular different types of mortgage products on the market, focusing on the way that their interest rates are set. Understanding this is important, as the interest rate on your mortgage is a big factor in how much you have to repay each month. First, let’s look at fixed rate mortgages.

As the term indicates, the mortgage rate on these products remains unchanged during the term of the fixed rate, regardless of any changes in interest rate, such as the Bank of England bank rate. Such products commonly have a term of two to five years, although longer terms, like 10-year mortgages, are sometimes available.

Fixed rate deals are popular with borrowers who need certainty about their mortgage costs to help with their budgeting, as the repayment won’t change throughout the mortgage. But whilst fixed rate mortgages provide certainty to borrowers, they do have a couple of downsides. If bank rate falls during the fixed rate term, those on fixed mortgages will not benefit from a lower mortgage rate: although fixed rates will also protect you from higher mortgage rates if bank rate rises.

In addition, fixed rate mortgages usually come with early repayment charges, which you’ll need to pay if you want to repay the mortgage early. This includes if you want to move to a new deal.

The other key issue is what happens when the fixed rate term comes to an end. At this point, the rate typically reverts to the lender Standard Variable Rate, or SVR, which may be much higher than the fixed rate that is terminated. This reversion rate risk is one fixed rate borrowers need to be alive to. We’ll look at SVRs in more detail next, as we move on to examine variable rate mortgages.

There are three main types of variable rate mortgages: trackers, discount mortgages, and standard variable rate mortgages. Let’s look at the Standard Variable Rate mortgage, often abbreviated to an SVR mortgage. You usually won’t opt for these mortgages when choosing a product, but it’s the type of mortgage you end up on when other mortgage deals come to an end.

The SVR is set at the discretion of the lender. It will move up and down periodically, usually when the Bank of England moves the main bank rate up or down. Note that mortgage lenders are not obliged to follow moves in bank rate, either in timing or in scale, when setting their SVRs.

For example, bank rate could rise by 0.25%, and a lender’s SVR could rise by 0.35%. When you’re looking for a mortgage, the main variable rate product you’ll see is known as a tracker. Here, the mortgage rate is contractually linked to a major interest rate: usually the Bank of England’s bank rate.

For example, the tracker rate could be bank rate plus 1%, so when bank rate moves up and down then so does the tracker rate by the same amount. Trackers tend to have initial deals lasting for two to five years, though you can get lifetime trackers. Tracker mortgages don’t have early repayment fees, so you can usually switch to a new deal without waiting for your initial tracker deal to end.

Also in the variable rate mortgage stable are what’s known as discount mortgages. These deals usually offer a discount off a lender’s standard variable rate. This means that if the lender raises its SVR, you will pay more each month.

Again, these deals are usually over a short period of time: for example, two to three years, though longer deals are available. Unlike trackers, though, discount mortgages do tend to have early repayment fees if you want to repay your mortgage while you’re still in the initial discount period.

However, know what you’re getting into here, as it can be confusing. If it says a 1.5% discount, make sure you know what that means. Is 1.5% the rate you’ll pay, or is the 1.5% the discount you get off the lender’s SVR? Check carefully.

Variable rate mortgage products tend to be good when bank rate is falling or low and stable. By contrast, they are not good for borrowers when bank rate rises, since the mortgage rate will rise, thereby increasing the monthly cost of the mortgage to the borrower.

However, the more you’re in need of certainty over what you pay, the more you should think about going for a fixed rate mortgage. There’s plenty to think about when choosing a mortgage product, and specifically its interest rate characteristics. Let’s finish with a summary of the key features of fixed, SVR, tracker mortgages, and SVR discount.