In the mortgage market, there are two main types of mortgage products that you can choose from when applying for your new mortgage. We have explained how each of these works and how they impact your mortgage payments.
Fixed rate mortgage products
A fixed rate mortgage product has a set interest rate for the length of time that you agree to take it for. The most common being 2 and 5 year fixed rates, however there are many more options such as 3, 7, 10 or lifetime fixed rate products. The length that you would fix your mortgage for is influenced by factors such as your views on interest rates and your life plans along with how long you may stay in the property you are mortgaging.
The benefit of taking a fixed rate is that this type of mortgage product allows you to budget given the set monthly payments that you will have. Also, if interest rates increase during the period you are fixed into your product, you will not be impacted by these increases until the end of your fixed period.
However, the drawback of taking a fixed rate mortgage product is that should interest rates reduce during the time you have your product, you will not benefit from these reductions as the interest rate you have is set.
Variable rate mortgage products
There are two main types of variable rate mortgage products, these are a base rate tracker and a discounted variable rate. Both products work very differently so it is important to understand the differences and how changes in the market would influence your mortgage payments.
A base rate tracker mortgage is directly linked to the Bank of England base rate, these products sit at a set margin above the base rate and will change in line with any changes that the Bank of England decide to make. Therefore, should the base rate reduce, you should see a reduction into your mortgage payments soon after. On the other side, should the base rate be increased, this would see your mortgage payments increase. Mortgage lenders will update you should there be a change in your mortgage following a Bank of England decision.
As for discounted variable rates, this type of mortgage product is linked specifically to the lenders standard variable rate. This means that the rate you are being charged will only change when the lender decides to amend their own standard variable rate, this is not always dependent on market conditions as it is completely up to the lender as to when they change this. Even if there was a reduction in the base rate or it increased, the lender does not always pass this change onto their standard variable rate. With this type of product, it is not so easy to predict when you might see a change in your interest rate and in turn your mortgage payments.
The reason someone might take a variable rate mortgage product would be to benefit from falling interest rates. However, this type of mortgage product gives you no certainty or the ability to budget your finances as your mortgage payments could change at any time by any amount.