Posted Nov 18, 2011

Securing mortgages is an essential part of financing the acquisition of property for most people.  While lending criteria have been tightened up across the board since the Crunch of 2008, there is still a steady stream of business being processed by the established providers of  mortgages like mortgages from Santander.  While finding information about different mortgages is fairly straightforward, selecting which type of product that will suit best can be a bit more difficult.  Here we look at the two broad categories of mortgages with a view to comparing some of the pros and cons.

Fixed rate mortgages seem fairly self explanatory, providing a set rate of interest for an agreed period of time, which is typically a couple of years.  Knowing exactly what you’ll have to pay for your mortgage over this time can be very handy when it comes to budgeting, and is therefore particularly attractive to those with tight finances.  However, the rate that these mortgages are fixed at will be higher than the variable alternatives from the same lender, at least at the time you take the mortgage out. 

That being said, variable rates are, well variable, and can be increased rapidly.  What’s more, depending on the type of product, this increase may occur independently of a rise in the Bank of England Base Rate of interest.

 There are basically two types of variable rate mortgages provided by lenders.  Tracker mortgages offer to track in line with Base Rate movements.  Typically, they will track one or more percentage points above the Bank of England Base Rate.

The other type of variable rate mortgages set interest according to the lenders own Standard Variable Rates.  While Standard Variable Rates are influenced by the Base Rate, they can move independently, basically at the lender’s discretion.  Limited period discounted deals are generally offered to encourage borrowers to take out variable rate mortgages, with discounts of up to around three percent off the lender’s Standard Variable Rate not uncommon.

The current record low Base Rate poses an interesting challenge for those deciding on which type of mortgage to go for.   One way of looking at the situation is that tracker and variable rate mortgages cannot get any cheaper – a rise in the Base Rate is the only movement possible - and this will have the knock on effect of increasing the cost of both tracker and variable rate mortgages.

However, the interest rates offered by most fixed deals are considerably higher than that set for the best trackers and variable rate mortgages out there.  Thanks to both the current poor state of growth in the economy, and the projected stagnation for at least the next nine months or so, the Base Rate is unlikely to be increased any time soon.

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