Choosing the Right Mortgage.

One of the decisions you will make concerning your property, is what type of Mortgage you should choose, short term gain can sometimes be long term pain, when you select a fixed rate will you be stuck in a deal, whilst all around you prosper? It's a decision that will impact your finances for many years, and the decision should be a sound financial one, made with assistance from professional advisers.

This is a question and answer guide to Fixed Rate Mortgages against Discount Mortgages


Question

What are discount mortgages, are they the same as tracker mortgages?

Answer

Similar but not the same.

First, understand that you have quite a few different rates in the market, The Bank of England have the base rate, this is not the same as a lenders base rate, (or Standard Variable Rate). When the bank of England change the base rate it does not always follow that your lender will, they can move their rates up and down when they like.

If you look at the past most lenders will change their rate when the Bank of England do, but it's not guaranteed.

So understand what you are being offered.

Tracker Mortgages are set to move with the Bank of England rate, which is set each month, so for example a rate of Bank of England base rate +2% means you will have a mortgage rate of 2% above the Bank of England rate.

Check once again the term of the deal, fees etc.

Discount rates normally offer customers a great up front discount to gain your custom, the rates are normally much cheaper than normal, and will be for anything for 12 months to 5 years, the discount offered is normally off the lenders base rate, very important to remember.

You can be offered discount tracker Mortgages!

As an example of this if you are offered 1% discount of a tracker rate for a period of time.
To understand this, first find out the normal tracker rate.

Say 2% above the Bank of England Rate so with the discount of the tracker rate this deal will be 1% above Bank of England base rate for an agreed period.

With all the fees and discounts off this and that, it's important not to be sucked in by the headlines - it's what you will be paying that counts.


Question

What is a Fixed Rate Mortgage and how does it work?

Answer

A Fixed Rate Mortgage guarantees your rate will not change for an agreed set of time, if you are offered a fixed rate at 4% for 5 years then that is what you will pay whatever happens to the Bank of England rate or your lenders standard variable rate.

The Big advantage of this is that you know what you will be paying, the Fixed Rate Mortgage will give you the security and piece of mind in knowing you will not get caught out by and interest rate increases.

Now that's the big plus point and can not be underestimated but there are some down sides

- you are fixed, so if rates go down you will not move, if you do wish to break the deal you will have to pay a sizeable fee to do so.

- Check to see what will happen after the deal ends; will you be on a less than favourable rate?

- What are the up front admin fees, these can have a big impact on your true rate of interest.

Summary when choosing a fixed or any type of discounted Mortgage.

The biggest consideration you must give is your financial security, if you are tight on money the fixed rate will give that security of knowing how much you will be paying each month, knowing that if interest rates do move you are safe in the knowledge you have a fixed rate.

With any sort of discounted rates you are having a bit of a gamble, on the face of it you will probably start of with a smaller payment and if interest rates stay put you will probably end up paying less over a fixed rate over the initial term, but will you be able to afford the payments if interest rates jumped 1, 2 or 3%, if this scenario is a catastrophe financially for you, then you should go with the Fixed Rate option.

If you are happy and understand the possibilities under a discount and are willing to take that risk safe in the knowledge that you will be OK if it goes against you, then a discount could be for you.

As a word of warning, check the terms for redemption; most discounted rates have a period of time after the discount expires in which you will have to pay a redemption fee to re-mortgage.

When considering the two options have a look to see what interest rates need to do in order for you to loose out, but remember that whilst we have had a period of historically low rates this does not mean it will stay that way.

Discuss the options fully with a professional!