Here comes the tricky bit. We often find that explaining the different types of interest schemes available takes the most amount of time and for good reason because there is quite a bit to understand. However by chatting to one of our expert advisors and following this guide it won't be long before you start to understand this part of the mortgage with enough knowledge to make an informed choice of what is best for you.
We'll start off by looking at the Bank of England Base Rate and the bank or building society's standard variable rate (SVR)
The Bank of England Base Rate is not a mortgage product like a fixed rate or base rate tracker which we'll cover shortly but they do have a big influence on mortgage rates so you should understand its function.
This is a snap shot of what the rate was at the Bank of England in August for each of the past 40 years. Interest rates are set by the Bank of England Monetary Policy Committee (MPC) who meets every month (usually the first Thursday in the month) and decides whether to increase, hold, or decrease the base rate. The MPC is made up of 9 members and they vote for their preference. The influencing factor is enabling inflation targets to be met but these interest rate adjustments effect mortgage rates so it is worth being aware of the Bank of England and what it does.
Some mortgages are directly linked to the Bank of England Base Rate, for example a base rate tracker. Lenders standard variable rates (SVR) are also indirectly linked to the base rate. If you have a fixed rate then you will not be affected by the Bank of England base rate changes during your fixed rate period.
The lenders standard variable rate, SVR for short, is the rate that your mortgage will revert to after any initial deal period ends. In the past the SVR was a stand alone product that you could freely take out even with just a 5% deposit. There was usually no arrangement fee and no charges for early repayment. However that has changed in recent times. As the Bank of England base rate started to drop in 2008, so did banks and building societies SVR's. This was in part due to some lenders contractual obligations of their SVR not exceeding a certain margin above the Bank of England Base Rate (for example 'we guarantee the SVR will never be more than 2% above the Bank of England Base Rate'). The lenders that didn't have these contractual obligations dropped their SVR's but not by anywhere near the same margin simply because they didn't have to. At the same time fixed, capped, discounted and tracker rates did NOT drop by the same margins and so we were left with a situation where by for the first time the SVR is actually lower than the incentive deals on offer. What's more, they didn't have an arrangement fee and usually didn't have an early redemption penalty. It was no surprise then when all lenders stopped offering the SVR as a stand alone product.
The SVR is still of real importance however. Imagine you are presented with two offers from two different lenders, lets call them (A) and (B). Both lenders are offering you very similar deals with the same rate, set up fee, early repayment charges etc. The only difference is that (A) has an SVR of 2.5% and (B) has an SVR of 6%. In this case we would advise that you choose (A) because if their SVR is lower than (B) now, then there's a good chance it will still be lower when your initial deal expires.
Yes. Some lenders have relaunched their SVR for new customers whilst leaving existing customers with their original SVR. This has been done because many existing borrowers have, like mentioned above, SVR's that are guaranteed to be no more than a small margin above Bank of England Base Rate. Many but not all lenders have now introduced new SVR's (of course they are higher) for new customers.
When we talk about discounted rates we are referring to rates of interest that are discounted from the lender's SVR (Standard Variable Rate). Due to the SVR being a variable rate the rate you pay is also variable.
The discount is usually for a set period, say 2 years, following which the discount stops and you revert to that lender's SVR. A discounted rate of interest offers a true reduction off the lender's Standard Variable Rate that does not have to be repaid later on. Any increases or decreases in the SVR will impact on the rate of interest applied to your mortgage and therefore the monthly payment.
You can expect to find the majority of discounted rates on offer today to have arrangement fees for set up and early repayment charges for early redemption.
Like discounted rates, the rate on a base rate tracker (BRT for short) will vary. On the face of it discounted rates and BRT's are very similar. In fact when compared side by side there are many similarities, the rate, the set up fees and the early repayment charges, however there is one big difference between the two. Unlike a discounted rate a BRT is linked not to the lenders SVR but directly to the Bank of England. The rate you pay will be a margin above or below whatever the Bank of England Base Rate is currently. This can be advantageous if The Bank of England reduces it base rate and the lender doesn't follow suit (see graph above) In this instance if you were on a discounted rate you would not benefit from the Bank of England Base Rate reduction but if you were on a BRT you would.
A fixed rate of interest will guarantee that even when interest rates at the Bank of England or the lenders SVR are on the move your rate will stay the same. Fixed rates are therefore very popular with people who like to budget and know exactly what their repayments will be over a given period. Typically interest can be fixed for 1, 2, 3, 4, 5 years and sometimes longer however the most popular choice seems to be 2 and 5 year fixed rates. The trade off here is that the cost of knowing your monthly payment for a given timescale is that the rate you fix it at will almost certainly be higher than that of a discounted rate or a base rate tracker.
Unlike the Bank of England Base Rate that's reviewed at the beginning of each month, the rates the lenders offer (fixed, trackers, discounts etc) are often withdrawn without notice and replaced with rates that can be higher or lower. For example the Bank of England Base Rate may not change for many months but during the same period lenders will withdraw, reprice and relaunch many times over the same period. Lenders will often do this to control the levels of business they wish to receive.