The Many Types of Remortgage Deals To be Aware of and How They Are Structured
The Bank of England confirmed earlier in the year that they are intending on increasing the base rate. This has caused a flurry of remortgages and people trying to find the best deal. In this article, we explore the various mortgage types available and how they can benefit you.
The standard variable rate is the bank or building society’s standard interest rate for mortgage contracts. The interest rate is variable and so moves with the base rate set by the Bank of England. This deal type is usually what you will roll onto once a fixed or discount deal ends.
Standard variable mortgages are usually quite flexible in terms of the fact that you do not have to pay any penalties if you repay the mortgage at any time. On the flipside, the base rate affects the mortgage interest rate so if interest rates increase, then your mortgage will too.
By far the most popular contract type at the moment is fixed rate deals. With these, the interest rate stays the same throughout the first few years, so no matter what the base rate does, your monthly repayments will never change until the deal runs out.
When the fixed period finishes, the contract will then go back to the standard variable rate. You should be fully aware, however, that if you enter into a fixed rate contract, you may have to pay an early repayment charge if you pay back the loan before the fixed period ends.
Discounted mortgages are not so common today, but they are still available. The initial period offers a discounted interest rate, which may be for example 2% lower than the base rate. Like fixed rate contracts, they would then revert to the standard variable rate of the lender.
The main disadvantage however is that as you are being offered a discount on the interest rate, large arrangement fees are charged by the lender so you may have to pay one to two thousand pounds upfront to benefit from lower initial repayments.
One of the most flexible contracts available is an offset mortgage contract, which is nowhere near as complicated as many people believe. The mortgage has a savings account linked to it, and you can use this account to pay off your mortgage more quickly.
Any disposable income that you have can be placed in the savings account and this reduces the amount that you owe on your mortgage. You only pay interest on the mortgage amount minus the savings amount so monthly repayments can be lower too. If you maintain the repayment amount however, even if the interest reduces, you can shorten your mortgage term.
It can be quite baffling if you are not familiar with mortgages, so it may be best to seek advice from a mortgage consultant who can explain anything to you that you are uncertain about, as it is imperative that you understand what you are entering into.
Timothy Frodsham writes for Just Commercial Mortgages.com the UK’s No.1 site for the latest commercial mortgage rates and commercial property finance news.