Mortgage Product Review

Catherine Alexander
Partner and Mortgage & Protection Adviser at GDA

It has been a turbulent time in the mortgage market and gone are the days when you could fix for five years at super low interest rates with barely a second look. Although interest rates are slowly coming down now that inflation appears to be under control, supported by the reduction in the Bank of England base rate, mortgage interest rates from the lenders are still on average between 4% and 5%. Although all types of mortgage work in a similar way, factors like interest rates, repayment methods, and fees can differ between products. Because of this, finding the best product isn't as simple as choosing the lowest rate, but more about finding the right mortgage to suit your circumstances.

In this post we’ll review the main types of mortgage product you are likely to come across:

• Fixed Rate Mortgages

• Variable Rate Mortgages

  • Tracker Mortgages

  • Discounted Rate Mortgages

• Offset Mortgages

• Flexible Mortgages

In addition to these types of mortgages are those which are slightly more complex or specialised, and we’ll review these in a subsequent post.

Fixed Rate Mortgages

With a fixed-rate mortgage, the interest rate is fixed for a set amount of time and won't be affected by Bank of England base rate rises or fluctuations in the financial markets. This fixed interest rate is often referred to as the initial rate and you are locked into the initial rate for a set period of time. If you decide that you don’t want the mortgage anymore during the initial period, you'll be subject to an exit fee known as the Early Repayment Charge. A fixed-rate mortgage is a great choice for someone looking for security and the ability to accurately budget at the beginning of their mortgage, such as a first-time buyer. They're also suitable for homeowners who want to lock in a good mortgage rate, especially if they believe the base rate is due to rise at some point.

Variable Rate Mortgages

A variable rate mortgage is a product in which the interest rate can change at any time, either to a higher or lower amount. Unlike a fixed-rate mortgage, there is no period where the rate is locked in. This type of mortgage is affected by the Bank of England's base interest rate, as well as other factors. There is more than one type of variable rate mortgage to consider. For each one, the interest rate you pay is calculated slightly differently, giving each one advantages and disadvantages depending on what your needs are. A variable rate mortgage is for those who want the freedom to switch mortgage products at any time or if you can see yourself moving home in the future.

Types of variable rate mortgages include:

Tracker Mortgages

A tracker mortgage is a type of mortgage product where the interest rate is equivalent to the Bank of England base interest rate, plus a few percentage points set by your lender. For example, if the base rate is 4%, you might pay that plus 0.75% for a rate of 4.75%. This means that when the base rate falls, your mortgage rate will 'track' it and you will pay less. However, the same happens when the base rate rises, so you could end up paying more each month. This type of mortgage is good when you are confident that the base rate is set to fall but can comfortably pay more if the rate increases again over time.

Discounted Rate Mortgages

With a discounted mortgage you pay a reduced version of the lender's standard variable rate (SVR). The amount of discount is fixed, and the reduction is applied whether the SVR is increased or decreased by the lender. For instance, if the SVR was set at 8% and your product applied a fixed 3% discount, you would only pay a 5% mortgage rate. If the lender decreased the SVR to 7%, your rate would be reduced to 4%. This type of mortgage is good for first-time buyers, looking for a cheaper rate during an introductory period, who can accommodate paying more should the SVR increase.

Offset Mortgages

An offset mortgage allows you to link your mortgage and your savings together to reduce the amount of interest you are charged. It works by offsetting the value of your savings account against how much you borrowed for your mortgage loan, so that you are only charged interest on the amount left over. Because your mortgage rate is applied to a reduced figure, the amount of interest you pay each month will be lower. For example, if you have £15,000 in savings and a £100,000 mortgage, you would only pay interest on £85,000. At an interest rate of 3%, that means you'd be paying £2,550 in interest per annum, as opposed to £3,000.

Just remember, when you offset your savings, you won't be able to earn interest on them. However, you don't pay tax on them either, which can be beneficial if you are in a high tax bracket. This type of mortgage is good for homeowners who have a lot of savings that they don't have immediate plans for, especially those in a high tax bracket. They're also useful for those who want to help a relative who is a first-time buyer, as some lenders allow you to offset your own savings so that another can access a better rate.

Flexible Mortgages

A flexible mortgage is a product that is designed to give you more freedom in how you repay, usually by allowing you to overpay and underpay your loan. There may also be other features available, such as the ability to take a payment break, borrow money back, and have your interest calculated daily. To facilitate some of these extra features, lenders are more likely to charge a higher interest rate than regular mortgage product. This mortgage can be good for those who need more financial flexibility or those that want to overpay their mortgage product to reduce overall interest.

This article isn’t personal advice. If you’re not sure whether a course of action is right for you, ask for financial advice. Your home may be repossessed if you do not keep up repayments on your mortgage.