Remember the ad run by the Financial Regulator a number of years ago which highlighted the lack of knowledge in relation to financial products? Well because we know that you may not be too au fait about the types of mortgages available, we have designed a straight forward guide for you.
A tracker mortgage is a type of mortgage which is linked to the current European Central Bank (ECB) base rate plus a margin determined by the lender at the time of drawing down the mortgage. This margin is usually set somewhere between .70% – 1.25% and once agreed upon, will should never deviate above or below this for the duration of the mortgage term.
If you have a tracker mortgage of ECB (currently 0.75%) plus 1.00% (the lenders margin), your interest repayments is 1.75%. As the ECB increases or decreases interest rates, your mortgage interest rate will ‘track’ the changes.
Standard Variable Rate (SVR) Mortgage
Repayments will increase and decrease in line with the lenders interest rate changes. This rate is not subject to the ECB base rate, but more in line with the lenders appetite to increase revenues as the cost of funding increases for the bank. In the good old days, lenders maintained competitive SVR mortgages in an attempt to win new business. However, we know that banks are suffocating from lack of funds. As they can’t increase the margin they charge to their tracker mortgage customers, SVR mortgage holders will often times make up the difference.
Fixed Rate Mortgage
A fixed rate mortgage provides considerable peace of mind for the mortgage holder as the interest rate agreed over a certain term (typically 1, 3 or 5 years) is guaranteed. A fixed rate mortgage is not subject to a volatile market or the ECB increasing interest rates. However, if interest rates fall, the fixed rate mortgage holder is locked in at a rate which may look very unattractive in relative terms. Finally, if you wish to break out of the fixed rate contract, you may be subject to a substantial penalty by your lender.
Did you know…
– You can often times opt to fix a certain percentage of your mortgage to hedge against interest rate increases?
– You need to contact your lender if there’s any fear of late mortgage repayments?
– Interest only, reduced repayments or repayment holidays are available should you become unable to repay your mortgage in full through loss of income or unemployment?
– Over-paying your mortgage every month will dramatically reduce the remaining term