There are many mortgages available to choose from and it can be tricky to know which to go for and how to choose. Even if you have had a mortgage in the past this can be a daunting task. Choosing a mortgage is a big decision as you are borrowing a lot of money and sometimes it is not easy or free to switch lenders. Therefore, it is important to pick the right one for you. It is worth using a financial advisor if you can afford it and do not want to spend the time researching yourself. However, if you do decide to research yourself, you need to understand the difference between different types of mortgages, so that you are able to pick the one that will suit you the best.
Fixed rate mortgage
With a fixed rate mortgage you will have the interest rate fixed for a certain period of time. This is unlikely to be for the full term of the mortgage but perhaps for between two and five years. This will protect you against any rate rises as the rate will remain the same and will mean that you will know exactly what you will be repaying each month. It can particularly suit those people who feel that they will struggle if the amount that they need to pay will go up. It will also be useful if you feel that rates will rise above that fixed rate amount. No one can really predict rate rises though so it can be hard to know what might happen in the future.
A fixed rate mortgage can be a problem because you will not be able to take advantage of rate reductions. This means that you could be paying significantly more than necessary, particularly if rate reductions happen just after you take out the mortgage and your fixed rate period is a long time. You may feel that this will be find as you can just switch to a different mortgage. Unfortunately, fixed rate mortgages tend to tie you in to a certain time period. So, you are not allowed to switch during the fixed rate period and possibly even after that. You may be able to move if you pay for it and it has been known for borrowers to have charges of thousands of pounds even to move from a fixed to variable rate mortgage with the same provider. You therefore need to be very careful that you are sure this is the right option for you and that you are completely aware of any costs of moving to a different mortgage or different lender.
Variable rate mortgage
A variable rate mortgage is riskier, in that if the interest rates go up you will pay more. Usually a lender will increase their rates when the base rate goes up, but with a variable rate they are entitled to change it whenever they like. This means they can put it up or down at any time and this could be costly for you and may make it difficult for you to find the extra money to repay it. Of course, if rates go down you will benefit from that and this means that it could be a cheaper way to borrow compared with a fixed rate. Although, if rates go up, you may find that it is dearer than a fixed rate. Again, which one you choose, may depend on how well you think you could manage if the rates went up and whether you think there is a risk that rates will increase or if you think that they will decrease.
A tracker mortgage will track the base rate. This means that you will pay a certain percentage or lump sum to the lender plus the base rate. If a change is made to the base rate, you will automatically start paying at that altered level. This means that if rates fall, you will immediately start paying at the lower rate. Sometimes, when you are on a variable rate, the lender will not reduce the rates when the base rate falls. They are under no obligation to do this and so you could miss out on the cheaper rates. Of course, if the rates rise then the opposite will happen and rates will go up right away. This is likely to happen anyway with a variable rate account anyway as lenders will want to start making more money as quickly as possible.
Some people prefer this type of account compared to a variable account because they are able to take advantage of rate reductions right away. If the amount the lender charges on top of the base rate is very small, this can make it a lot cheaper than a variable rate mortgage as well. It is worth thinking about whether it is right for you. It has the same disadvantages as a variable rate in that you will not know how much you are paying each month and the same advantage that the rate can drop, but the lender has to drop the rate if the base rate falls if you have a tracker account but with a normal variable account they do not have to do this.