Variable rate, discounted variable rate. What's it all mean?
Mortgage lenders have a standard variable interest rate, which is based on the Bank of England’s base rate and their own costs. If you have a discounted variable rate mortgage, your interest rate will then be set at a fixed percentage below the standard variable rate. Our mortgage team is more than happy to help you decide which mortgage is right for you. We are very flexible and offer appointments over the phone, via video call or face to face to discuss your tracker mortgage from 08:00 - 20:00.
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The importance of affordability
For most of us, buying a home will be the biggest financial decision we’ll ever make.
When finding a mortgage product that will meet your requirements, both your income and outgoings will play a part.
The EU Mortgage Credit Directive of 2015 introduced stricter lending criteria, which led to mortgage lenders having to take greater steps to check affordability – including on remortgages.
These rules require your lender to check you can afford your repayments, both now and in the future. To do this, they will need information about your income and outgoings. You will have to inform them if you expect your income and outgoings to change in a way that means you’ll have less to spend on your mortgage repayments. You will also need to provide your mortgage lender with evidence of your income.
Variable Rate Mortgages
The monthly mortgage payments on variable rate mortgages can rise so factor in any changes when budgeting for your mortgage. You need to decide how much you can safely pay each month If you choose a variable rate mortgage, your interest rate can move up and down over time, so your monthly payments are likely to reflect this.
A standard variable rate (SVR) is a variable rate mortgage that you’ll usually be moved on to once your existing mortgage ends – unless you choose to switch to a new deal by remortgaging.
All mortgage lenders have and each set their own standard variable rate. The SVR rate along with your mortgage repayments, can go up or down at any time. Although the SVR can be influenced by changes in the Bank of England base rate, unlike tracker mortgages, SVRs do not track above the base rate at a set percentage and so do not have to strictly follow it. Many other factors can influence the SVR and mortgage lenders can choose to lower or raise its SVR at any time it wants.
Reading this you may think its quite risky being on a standard variable rate mortgage but it does have benefits to you. Initially your mortgage might have lower arrangement fees than a fixed-rate or tracker deal, these are the fees a lender charges for your mortgage. You also have the freedom to overpay or clear your mortgage without having to pay an early repayment charge.
It’s up to individual lenders to decide when they’ll change variable mortgage rates. Unless you’ve got a tracker mortgage, they don’t necessarily have to stay in line with changes in the Bank of England (BOE) base rate.
Its wise to know the possible disadvantages of a standard variable rate mortgage. Your mortgage provider’s standard variable rate is likely to rise and fall during your mortgage deal, should the rate increase too much it may become a struggle to afford your monthly mortgage payments. Variable rates are not known for being the most competitive rates on the market and you would most probably find a better mortgage deal to suit your monthly budget.
The two most common ways of repaying your mortgage are capital repayment and interest only.
On a repayment mortgage, your monthly payments will partly go towards repaying the interest accrued on the money you’ve borrowed and partly towards repaying the capital sum (i.e. the amount you borrowed).
The benefit of capital repayment is that you’ll be able to see your outstanding mortgage reducing each year (albeit very slowly in the early years), and you are also guaranteed that your debt will be repaid at the end of the mortgage term, as long as you keep up your payments. On a capital repayment mortgage, the shorter the term you pay your mortgage over the bigger your monthly payments will be.
By having a longer term, you may benefit from a lower monthly payment, but you will also pay more interest to the lender over the mortgage term.
Capital repayment is the most common way of repaying your mortgage.
Interest Only Mortgage
For an interest only mortgage, your monthly payments will only cover the interest on your mortgage balance. The capital you owe (i.e. the amount you borrowed) will not go down and you will need to repay this in full at the end of your mortgage term. This means you will need to make a separate investment or combination of investments to generate the capital required, and you will also need to prove that you can afford to do this.
You should bear in mind that the value of investments can go down as well as up and you may not get back the original amount invested. For an interest only mortgage, the lender will need to see your plan for repaying the loan when the interest only period ends. If you fail to generate enough to repay your mortgage by the end of the mortgage term, you may be forced to sell your property.
With an interest only mortgage, you must be able to demonstrate how you will repay the capital sum at the end of the term.
It’s easy to underestimate the mortgage costs involved when buying a property.
Lenders may ask you to pay a valuation fee. The type of valuation you choose will depend on factors such as the age and condition of the property.
These are the costs your lender will charge you for arranging your mortgage. Some lenders will allow the fee to be added on to your mortgage, but this means you will be charged interest on it over the mortgage term.
The fees charged by a solicitor will include their conveyancing fee (i.e. for the transfer of land ownership), as well as charges for legal registrations and other miscellaneous costs (known as disbursements) such as local search fees and Land Registry fees. Some lenders may offer to finance some or all of your legal costs as an incentive.
If the amount you wish to borrow is greater than a specified proportion of the property’s value (typically 75%), you may incur a higher lending charge.
Lenders may charge an ERC if you make an overpayment in excess of any stated limit, if the loan is repaid early or if you remortgage during the early repayment period. This can amount to a significant cost, so you should always check the early repayment terms in the offer letter from your lender.
Lenders may charge a fee to release the deeds of a mortgaged property to you or a new lender.
Before we get started, we will explain how we will be paid for arranging your mortgage if it all.
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Your home or property may be repossessed if you do not keep up repayments on your mortgage.