Transcript

NARRATOR

In this video, we explore the most popular types of mortgage products on the market, focusing on the way the interest rates are set. Understanding this is important, as the interest rate on your mortgage will determine 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 remain unchanged during the term of the fixed rate, regardless of any changes in the 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 them with their budgeting.

But whilst fixed rate mortgages provide certainty to borrowers, they do have some potential downsides. If Bank Rate falls during the fixed rate term, those on fixed mortgages would not benefit with a lower mortgage rate. Although, clearly, if Bank Rate rises, fixed rate customers do not see their mortgage rate rise. In addition, fixed rate mortgages usually come with arrangement fees, and early repayment charges apply too.

The other key issue is what happens when fixed rate term comes to an end. At this point, the rate typically reverts to the lender’s SVR, which may be much higher than the fixed rate that has terminated. This reversion rate risk is one fixed rate borrowers need to be alive to.

So let’s look at variable rate mortgages. There are a number of different types. One type is a Standard Variable Rate mortgage, often abbreviated to an SVR mortgage. Here, the mortgage rate is set at the discretion of the lender. It will move up and down periodically, usually when the Bank of England moves its interest rate, known as Bank Rate. 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 the lender’s SVR could rise by 0.35%.

The other main variable rate product is known as a tracker. Trackers have become very popular in recent years. 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.

Variable rate mortgage products, be they SVRs or trackers, are good for borrowers when Bank Rate is falling. 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.

So 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, and tracker mortgages.