Just like when you take out any other loan, you need to understand the terms of your repayment when you are looking to buy your next home. It is tempting to focus solely on the quoted monthly payment to figure out if you can afford a mortgage. However, you also need to know what the interest rates are and understand how this can impact your monthly payment.
The Bank of England’s base rate looks likely to rise to 4% this year, with some forecasts even suggesting a rise of up to 6%. This only adds to the cost of living crisis, so to make sure you can weather the storm, we will look at how this will affect different types of mortgages.
Fixed Rates
Fixed-rate mortgages are popular for the simple fact that your monthly payment will stay the same for a fixed term. This is incredibly helpful when you are putting together a monthly budget because you know what to expect. Usually lasting between 2 and 5 years, your mortgage lender allows you to borrow at the same rate, no matter the interest rates on the market. You will incur a penalty charge if you leave before the end of your fixed term.
When this fixed period ends, you will move on to a Standard Variable Rate (SVR), which will likely be an increase in your monthly payment. Double-check the end date of your fixed term to see if this will take effect this year.
Variable Rates
As the name implies, variable rate mortgages can change the amount of interest at any time. This is a riskier option, as you have to be able to afford larger monthly payments when interest rates rise. Higher risk can also lead to higher rewards, as the same applies when interest rates drop. You will have a smaller monthly payment and benefit from a drop in the market, unlike with a fixed rate.
If you have savings in place and feel secure, then a variable rate could be the best option. With base rates set to rise, you need to be prepared for higher monthly payments this year.
Discounted Rates
Discounted rates can be offered at the start of variable rate or SVR mortgages. Just like with fixed rates, this gives you a lower monthly payment when you first buy your new home. You are likely to be charged if you want to leave before the end of the discount period, which is usually between 2 and 3 years.
It is always useful to keep in mind the date for the end of your discount. Your monthly payment is likely to rise after this as the interest rate changes. To get the best deal, you should shop around, looking at the SVR offered and the discount on it. While a 2% discount looks better than 1%, if the SVR is at a higher rate for the 2% discount, you will be paying more.
SVR
Standard variable rate is loosely based on the Bank of England’s base rate. However, each lender can set their own SVR, so some may set a higher rate than the base rate to make a bigger profit. SVR can change at any time, but it offers more freedom than other mortgages. If your rate is not discounted or with a fixed term period, then you can also leave at any time without facing penalty charges.
Once on SVR, either from the beginning or after a fixed term, you will stay on this rate as long as your mortgage lasts or until you remortgage.
Consider a mortgage broker when looking to purchase your next house
The world of mortgages cannot help but be confusing. Offered rates vary so much that it is hard to work out what the average interest rates are and how this affects your monthly payments.
Hiring a mortgage broker to help you navigate the landscape is a wise investment to save yourself money in the future, especially if you are a first-time buyer. With oversight from an experienced broker, you will be able to find the best deal to keep you comfortable financially for years to come.
