A mortgage rate is the rate of interest charged on a mortgage. Mortgage rates are determined by the lender and generally fall into two categories: fixed-rate deals (which guarantee your rate for a set number of years), and variable rate deals (where your rate can go up and down depending on economic conditions).
Mortgage rates vary for borrowers based on their credit profile, and mortgage rate averages also rise and fall with interest rate cycles which can impact the home buyers’ market.
Fixed rate mortgage
Fixed-rate mortgages are the most common type of loan taken out by home buyers and by homeowners re-mortgaging.
With a fixed-term mortgage, you’ll pay the same interest rate for a set number of years, meaning your monthly repayments will remain consistent regardless of what happens to the Bank of England base rate.
Borrowers most commonly take out two-year or five-year fixed-rate mortgages, However, longer fixed term mortgages are available, such as 10-year fixed terms. Generally speaking, the longer your fixed-rate period lasts, the higher the interest rate will be.
At the end of your fixed period, you’ll need to re-mortgage. If you don’t, you’ll be moved to your lender’s standard variable rate (SVR), which is usually much more expensive.
The benefit of a fixed-rate mortgage is that regardless of what’s happening to the wider market, your interest rate won’t rise during the deal period. However, if rates do go down, you may end up paying more than you would on a variable-rate deal.
Standard variable rate (SVR) mortgage
As mentioned above, each mortgage lender has its own standard variable rate (SVR) that it can set at whatever level it wants. This is usually much higher than the rate you’ll be able to get on a fixed or tracker mortgage.
SVRs don’t change very often, and although they’re not directly linked to the base rate, they are often affected by it.
For example, if the base rate goes up by 0.25%, lenders may increase their SVR by the same margin, however they aren’t obliged to do so.
Tracker mortgages are variable rate deals that ‘track’ the Bank of England base rate, plus a set percentage. In short, if the base rate goes up so will your monthly repayments.
If the base rate goes down, you should pay less each month, however this isn’t always the case. This is due to some tracker mortgages coming with a ‘collar’, meaning the rate can only fall to a set level. So if the base rate falls, your payments might not follow suit.
As with fixed-rate mortgages, trackers have an introductory deal period (most commonly two years). After this, you’ll be moved on to your lender’s SVR if you don’t re-mortgage.
Discount mortgages are variable-rate deals that charge your lender’s SVR minus a fixed margin. So if your lender’s SVR is 5% and your deal charges the SVR minus 2%, you’ll pay a rate of 3%. Discount mortgages usually come with introductory deal periods of two years.
The benefit of a discount mortgage is that your rate will remain below your lender’s SVR for the duration of the deal and when SVRs are low, your discount mortgage could have a very cheap rate of interest. However, your repayments could become more expensive if your lender changes its SVR at any time.
When you buy a property with someone else – for example, a partner, friend, or family member – you’ll take out a joint mortgage. Both parties will be named on the mortgage agreement and property deeds and will be jointly responsible for making payments.
A joint mortgage should significantly increase your borrowing power, however it’s important to be aware that lenders will run a credit check on each applicant before granting a mortgage.
A 95% mortgage is a loan for 95% of a property’s price, where you put down a 5% deposit to cover the rest.
At Avant Homes, we can put you in touch with an independent Financial Advisor (IFA) who will weigh up your options and help decide which mortgage is the right one for you. What are you waiting for? Speak with one of our Sales Advisors and they’ll point you in the right direction so you can get the advice you need!