Which mortgage is best for me?

It remains to be confirmed, but the Governor of the Bank of England has hinted that a rise in interest rates could happen as early as November 2017.

This would be the first hike in interest rates for many years now, so if you’re currently looking for a mortgage, you should take good heed of this information as we could see the base rate steadily increase from now on.

It would therefore be prudent to take counsel from an independent firm like Cailean Mortgages where we will advise you on the difference between a fixed-rate mortgage and tracker or variable rate mortgages. And now’s the time to do it before any increase in the average rates.

With a Fixed Rate Mortgage, you have the certitude that the interest rate will remain the same over a set period of time. This will be discussed with you at the outset and could range from two years to as much as 10 years, although a period of two or three years tends to be the norm.

Your monthly payments therefore remain the same throughout that set period and, if there should be any increase in interest rates, you have no need to worry - your payments won’t change.

Of course, if interest rates were to go down, your fixed rate mortgage repayment would still stay the same and you may feel that you’re losing out in some way. However, given the low base rate at the present time, it is much more likely that interest rates will climb in the coming years rather than fall. And many homeowners prefer the security of knowing what their repayments are going to be for a number of years rather than worry whether they will continue to be able to afford their new home.

A Tracker Mortgage is quite similar to the variable rate mortgage mentioned above. Here, the interest rate follows (or “tracks”) the base rate set by the Bank of England at a set percentage margin either above it or below it.

You may have a tracker mortgage at Base Rate +2%. In this case, if the Base Rate of the Bank of England stands at 1%, your rate of repayment will be 1% + 2% = 3%. If the Base Rate were to increase to 1.5%, your rate of repayment would then increase to 1.5% + 2% = 3.5%.

Some clients are fearful of a Tracker Mortgage where repayments will increase in accordance with an increase in the Base Rate. The upside to a Tracker Mortgage is that, should the Base Rate fall, so will repayments.

The full name for a variable rate mortgage is a Standard Variable Rate mortgage, often shortened to SVR. It can be considered as the standard rate offered by a given lender without any special offers attached such as a fixed rate deal for two years.

Most people are happy to accept a special deal from their lender at the outset such as an interest rate that is fixed for the first three years of their mortgage. When this period comes to an end, your lender will automatically transfer you to its standard variable rate.

Usually, a lender’s SVR will follow any changes in the Bank of England’s base rates, whether these go up or down and it tends to range from some 2% above the base rate (0.25% as of October 2017) to as high as 5% over or even more.

However, it is also possible for a lender to change its SVR at any given time and you have no say in this, although you may wish to vote with your metaphorical feet and find a new lender! At this point, you may decide to give serious consideration to another fixed-rate deal.

But please do consider speaking to us at Cailean Mortgages first. Mortgages can be a minefield and you can rest assured that we have the expertise to advise you and explain all the ins and outs, the pitfalls and the benefits of each type of mortgage in a language that you will understand and help you come to the best decision for you and your personal circumstances.