A guide to Fixed rate and Standard Variable Rate mortgages

October 5, 2007 By

Buying a new home either through a high street vendor or online from one of the new wave of online property agents such Fish4 is one of the most important purchases you will make. With the vast array of mortgage products available from a wide range of sources can make selecting the best mortgage for you a daunting task.

One of the main considerations you will face will be whether to go with a Fixed rate as opposed to Standard Variable Rate mortgages. Talk to your financial advisor or consult a professional mortgages specialist such as Alliance and Leicester who will be able to fill you in on all the details.

Fixed-rate mortgages:

Fixed rate mortgage loans are the most common product on the UK mortgage market, with the majority of first-time buyers and mortgage borrowers seeking the consistency of a fixed-rate loan.

They give homeowners an element of stability and peace of mind. Shielding them from increases in base rate and consequent adjustments to lender, borrowers are able to budget for payments.

When choosing a fixed rate mortgage monthly payments are fixed for a specified period of time, whatever happens to the Bank of England base rate and the standard variable rate offered by your mortgage lender.

There are a wide variety of fixed-rate mortgages on the market. Generally they last for between two and five years, however, 10-year fixed-rate mortgages and even 25-year fixed-rate mortgages are becoming more common.

At the end of the fixed-rate term, the interest rate on the loan usually reverts to the standard variable rate offered by the lender. This is usually higher than the fixed-rate deal offered.

Should you wish to cancel your fixed-rate mortgage within the fixed period and transfer to another loan you’re likely to face an early repayment penalty. Some cheaper fixed-rate mortgages will also continue to charge an early repayment fee even beyond the fixed-rate period. Borrowers need to be aware of ‘tie-in period’ when they take out a fixed-rate mortgage.

Flexibility is an important aspect of any mortgage loan. Some fixed rate mortgage lenders now offer flexible deals including the ability to make unlimited overpayment with no charges.

The major negatives associated with fixed-rate mortgages are the early redemption penalties and extended tie-in periods. In a climate of falling interest rates, the lender’s SVR could go below the fixed rate and you could be left paying over the odds. Lenders also usually require an application fee to set up a fixed rate mortgage.

Variable Rate Mortgages:

Standard variable rates are set according to the movement of the Bank of England base rate at a rate between 1.5% and 3.5% over and above it.

Borrowers can usually move from a standard variable rate mortgage to another type of mortgage by paying an early redemption fee. If the Bank of England base rate falls, your mortgage payments may also fall. However, rises in Bank of England base interest are also reflected standard variable rate rises.

The unpredictable nature of Variable rate mortgages may make it difficult for borrowers to budget and even if interest rates fall lenders do not have to pass on the full value of the reduction to borrowers.

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