Choosing the Right Interest Rate Deal for You...

The Standard Variable Rate (SVR) Deal:
The basic mortgage package - you borrow from a lender at their standard variable rate (SVR), which “floats” a few points above the base rate set by the Bank of England. This means that an increase in the base rate is likely to push up your lender’s SVR and increase your monthly mortgage payments.

With the markets currently predicting that the base rate will rise to 6% by the end of the year, you should check that you’ll still be able to afford your monthly payments if your SVR rises by 0.5%. And don’t assume you’ll benefit if the base rate falls, as your lender might delay reducing their SVR.

On the upside, SVR deals tend to be less restrictive, allowing you to pay off your mortgage early or switch mortgages without paying any penalty charges. But bear in mind that this flexibility comes at a price - basic SVR deals are often more expensive than other types of mortgage on offer.

This type of deal has a couple of spin – offs:

The Discount Rate Deal:
As an enticement, many lenders will let you borrow at a discount to their SVR for an introductory period (between 1 – 5 years). Although this might soften the initial blow of making mortgage repayments, you could end up locked onto a higher rate when the discount period expires. So check your contract for restrictions on switching mortgages or penalty charges for early repayment both during the introductory period and after it ends. If it’s going to be costly to switch, make sure you’ll still be able to afford your monthly payments once the discount period ends.

Note that you’ll still be exposed to the risk of interest rate rises pushing up your monthly payments and, as you’re borrowing based on your lender’s SVR, there’s no guarantee that you’ll benefit if interest rates fall.

The Tracker Rate Deal:
You borrow at a floating rate which directly “tracks” the Bank of England’s base rate, rather than being set by your lender. This means that although you’re still exposed to the risk of higher monthly payments if the base rate rises, you can benefit from lower rates if the base rate falls. Check for any interest rate “collars” preventing your monthly payments from falling below a fixed level, as if the “collar” is just below the current tracker rate, you won’t reap the full benefit of falling rates.

Trackers are a good choice if you could stretch to higher monthly repayments and think that interest rates will peak out soon. However, watch out for hidden arrangement fees and penalty charges for making extra repayments.

The Fixed Rate Deal:
The other end of the mortgage spectrum – allowing you to borrow at a fixed interest rate for an agreed period (typically between 1 to 5 years). The big advantage is that during this time you’ll know exactly how much your monthly repayments will be - great if you’re on a tight budget – and you’ll be protected if interest rates do rise as expected.

The key is not to be caught out by hidden charges which can end up making a fixed rate deal much more expensive. Watch out for such as legal and valuation costs, arrangement fees and penalty charges for early repayment. However, the good news is that these extra restrictions vary enormously between lenders – so shop around. Don’t be blinded by headline figures but make sure you compare like with like – for example, a deal with a higher arrangement fee might actually be better value if it’s spread over 5 years rather than 2.

Following the recent spike in bond yields, many lenders have either pulled their best fixed rate deals or put up their prices. So if you’re on a tight budget and you need the security of a fixed rate deal – don’t delay in sorting one out.

The Capped Rate Deal:
The in-between option - combining the characteristics of fixed and floating rate deals. You borrow at a variable rate but with the added protection of an interest rate “cap”. So even if interest rates increase as expected, the rate you pay won’t rise above the “capped” level. You know the worst case scenario and can budget accordingly. However, as long as the rate at which you borrow is linked to the base rate and there’s no interest rate collar, you can still benefit if interest rates fall.

To sum up: all this choice may be confusing - but the benefit is that it offers the chance to find the deal that’s right for you. The key is to work out exactly how much you can afford to pay each month, as failing to keep up your monthly payments can put your home at risk.

While there are some good deals out there, in general remember that nothing comes for free – so choosing a deal with an advantage in one area means that you’ll probably pay for it in another. So whilst fixed rate deals could be a good option if you’re on a tight budget and you want peace of mind - note that you’re likely to pay for it through arrangement fees and charges for early repayment. If you can afford to take a gamble on interest rates, it might be worthwhile considering tracker or discount rate deals – but be ready to make higher re-payments if interest rates rise. Alternatively if you’re keen to make early repayments or want to be able to switch, a standard SVR deal is likely to offer greater flexibility, but with a higher price tag. Or if your priority is the overall cost of your mortgage, then you’ll need to work out all these hidden charges and then compare costs.

Either way, bear in mind that the deals outlined above will very from lender to lender, so you’ll need to do your own research and read the small print – maybe over a nice cup of coffee . . . .

Adela Read
Financial Journalist

Why Choose Norton Finance?
	Borrow £5,000 to £1,000,000		Borrow over 3 to 25 years
	Simple, fast and straight forward		Free yourself from unwanted debts