You may have heard the term “standard variable rate” or “fixed rate mortgage,” but not both at the same time. These two terms can be confusing for many consumers. Basically, they mean the amount you pay out each month is determined by a predetermined index. If the interest rate moves up, so does your monthly payment.
Standard variable deals are generally slightly more than fixed rate mortgages, sometimes by a large amount. However, if interest rates unexpectedly rise, you will not benefit from the change. Fixed rate mortgages have a certain level, usually around two percent, and it remains the same for the entire life of the loan. With these types of mortgages, the amount you pay out every month is always the same. With these types of mortgages, you can budget savings for unexpected expenses and plan your monthly payments for the long term.
In addition to these two very different types of mortgages, there are also three other different types. An adjustable rate mortgage offers the consumer a way to protect themselves from future increases in interest rates. These mortgages come in two flavors: the interest only and the repayment mortgage. The interest only mortgage requires the consumer to make interest payments each month. Repayment mortgages require the borrower to make monthly payments toward the principal balance, covering the interest plus any required reserves.
The biggest pitfall of a fixed mortgage is the long-term commitment required to keep the interest rate the same throughout the term. An interest only mortgage has no commitment after the introductory period expires; meaning you can begin making payments again immediately. A repayment mortgage has restrictions, which generally means you cannot make extra payments after the introductory period has ended. If you do happen to miss a payment, your interest rate will jump back up to the main rate. For most people, the reward for sticking with a fixed mortgage is significantly less than the risk involved in an interest only or repayment mortgage.
If you are considering adjustable rate mortgages, be sure to shop around. The interest rate, as well as the fees and charges vary widely by lender. Before you commit yourself to a lender, request free quotes from at least three different lenders to compare features, cost and fees. The best lender will offer you the lowest interest rate and the most flexible terms.
The other important decision to make is whether to purchase a fixed mortgage or an adjustable mortgage. Adjustable rate mortgages have advantages in that they do not fluctuate based on the economy. However, the disadvantages of these mortgages include an interest rate that often rises above the prime rate. This early repayment charge is often a lot higher than on a fixed mortgage. Most experts recommend choosing a fixed mortgage if you are planning to have a mortgage for the rest of your life.
Standard variable rate mortgage trackers vary according to the prime rate. As long as the creditworthiness of the borrower remains intact, the prime rate will continue to be set by the US Federal Reserve. Inflation will also continue to rise along with interest rates. When the economy does poorly, rising interest rates will hurt mortgage holders the most. In addition, mortgage lenders all set their own interest rates, so you should always shop around for the best possible rate.
One disadvantage to the standard variable rate tracker mortgage is that you cannot reduce your payments if interest rates fall below the base rate. In order to lock in the lowest possible rate, most borrowers need to pay the entire rate, up to the point that the balance surpasses the base rate. A base rate is usually set by the government and it is generally higher than the rate you would pay when you borrow using a variable.