FIXED RATES VS VARIABLE RATES
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Special rates are commonly used by lenders on mortgages in a bid to attract new customers. These special rates typically last between two and five years. While most people remain on standard variable rates few borrowers prefer to shop around and take advantage of the system.
While looking for mortgage, it is very important that you keep few things very clear for best results and keep a regular track on the mortgage market. There are different types of mortgages.
The first among them is standard variable where if the borrowers who fail to regularly monitor the value of their mortgage deals tend to end on standard variable rates. The repayments on these tend to be uncompetitive when compared to special offers on the market. The rate moves broadly in line with the Bank of England's base rate, although the lender is not obliged to pass on the changes to the contract letter.
Discounted mortgage deals are linked to a lender's SVR but tend to move at a discount of between 1% and 2%. These deals leave you exposed to the danger of rising interest rates. The pay-off is that rates tend to be more attractive than fixed-rate deals.
Tracker mortgages deals with work in a similar way as the variable rate mortgages. The difference is that here the mortgage tracks the Bank of England base rate rather than the lender's SVR. The plus point is that you are guaranteed to benefit from the full effect of any rate cut that the lenders may offer. Lenders frequently reduce their SVR, say, by 0.2% when the central bank has cut by 0.25%. Of course, you are also guaranteed to feel the pinch in case of rate hikes.
Next in line comes the fixed-rate mortgage. It is only applicable if you have stretched yourself in trying to buy a property or if you are a person who likes the security that your repayments won't change. However, this additional security involves higher rates on fixed deals and is higher than the variable special offers.
There are also few negative sides of these deals. The special offers are given by the lenders hoping that after they end, you will forget to move your mortgage and pay the punishing rates on their SVRs. Some deals keep you in a fix as fee is charged if you want to move the deal within a certain time frame. For example, a two-year fixed rate deal might have a 'collar' that stops you switching deals for a further three years. To avoid these, ask only for deals with no extended redemption penalties which can be sustained easily.
The most important point here to remember is that frequently switching deals will cost you more money. Each time you will face an administration charge, from £100 to £500, and a valuation fee of £150 to £200. You need to factor these costs into the equation when deciding whether to remortgage or not.
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