With more than one million homeowners expecting to see their fixed rate mortgage deals come to an end in the coming year, many may be questioning what deal to choose next.
Following the Bank of England’s decision to hold the Base Rate at 5.25 percent for three consecutive months, average fixed mortgage rates have finally dropped below six percent as market stability somewhat resumes.
From another fixed rate to trackers and offset mortgages, choosing the right deal is “important”, Adrian MacDiarmid, head of mortgages at Barratt Developments has said, “as it can help save you a lot of money.”
Mr MacDiarmid added: “While a fixed-rate mortgage is the most popular option overall, there are a lot of new products available now tailored to specific buyers.”
Fixed-rate mortgages
With a fixed-rate mortgage, repayments remain the same for a set period, usually ranging from two to five, or occasionally up to 10 years.
Mr MacDiarmid said: “This gives you the certainty of knowing what your repayments will be regardless of market interest rates. Fixed-rate mortgages are among the most popular mortgage types, accumulating the most average UK monthly searches. It’s perhaps surprising that 32 percent of homeowners are unfamiliar with this mortgage.”
According to Mr MacDiarmid, the pros and cons of this mortgage type include:
Pros
- Peace of mind that monthly payments will stay the same
- Ideal for those on a tight budget looking for stability.
Cons
- If interest rates drop, people won’t benefit from lower repayments
- Choosing to switch from certain long-term fixed-rate mortgages early can lead to significant exit penalties.
When a fixed-rate mortgage ends, people are either switched to their lender’s standard variable rate (SVR) or have the option to remortgage. Opting for a remortgage typically involves being offered a new rate from their current deal, referred to as a Product Transfer.
However, Mr MacDiarmid noted: “If you want to switch before the deal ends, you’ll usually pay an early repayment charge.”
First-time buyer mortgages
First-time buyer mortgages are designed for people purchasing their first home. According to Mr MacDiarmid, these are often tailored to accommodate this group’s “unique financial circumstances and needs”.
He explained: “Various mortgage products are specifically targeted at first-time buyers, including low-deposit mortgages that offer first-time buyers the potential to secure a property with a lower down payment, and fixed-rate mortgages that offer a stable interest rate for a predetermined period.”
According to Mr MacDiarmid, the pros and cons of this mortgage type include:
Pros
- Typically offers lower deposit requirements compared to other mortgage types
- Exposure to Government schemes and financial help, including lifetime Individual Savings Accounts (ISAs) and shared ownership.
Cons
- First-time buyers may be offered higher interest rates compared to those with a larger down payment or a more established credit history
- Lenders may impose strict eligibility criteria for first-time buyers, making it challenging for those with a limited credit history or lower income.
Offset mortgages
Offset mortgages allow people to keep their mortgage debt and savings with the same bank or building society. In this arrangement, savings are used to offset and reduce the amount of mortgage interest charged.
Mr MacDiarmid said: “Offset mortgages can potentially help reduce the interest you pay. However, 89 percent of homeowners are unaware of this mortgage type.”
According to Mr MacDiarmid, the pros and cons of this mortgage type include:
Pros
- It can help reduce the amount of interest paid on a mortgage
- It can give people peace of mind to know their savings are working to reduce their mortgage interest.
Cons
- Offset mortgages can be more complex to understand and manage
- Payments on the mortgage may increase if the borrower makes a withdrawal from their offset savings.
Tracker mortgages
A tracker mortgage offers an interest rate that “tracks” the Bank of England’s Base Rate, meaning it has the potential to fluctuate. According to Mr MacDiarmid, it generally tends to stay below the rate of a standard variable rate (SVR) mortgage and two in three homeowners are unaware of this mortgage loan.
Mr MacDiarmid said the pros and cons of this mortgage type include:
Pros
- If the base rate falls, your mortgage payment costs will fall
- Certain tracker mortgages have a cap, meaning the interest rate won’t go beyond a set limit, even if the base rate rises
Cons
- If the Base Rate increases, mortgage payments will increase
- People won’t know how much their repayments will be throughout the entire deal period
- People might have to pay an early repayment charge if they want to switch before the deal ends.
Lifetime mortgages
According to Mr MacDiarmid, this is a product designed for mature homeowners that allows them to convert a portion of their home equity into tax-free cash, without the need to sell their home, give up ownership, or make monthly mortgage payments.
He said: “There are almost seven million homes in England headed by someone aged 65 or over. However, 71 percent of UK homeowners are unaware of lifetime mortgages.”
Pros
- A lifetime mortgage provides a tax-free income source, allowing retirees to enhance their cash flow during retirement years
- Borrowers are not required to make monthly mortgage payments as long as they continue to live in the home,
Cons
- Interest on a lifetime mortgage accumulates over time, which increases the loan balance and reduces the homeowner’s equity, as well as the amount of inheritance for the family.
- Obtaining a lifetime mortgage could potentially disqualify people from means-tested benefits that they would otherwise be eligible for.
Mr MacDiarmid said: “The many options available mean that it is always a good idea to take advice from a suitably qualified and regulated mortgage adviser who will be able to help you find the product best suited to your circumstances.”
