Mortgages: Repayment options

Before addressing the different types of mortgages, it’s important to first understand the role the Bank of England’s base rate plays. The base rate is a key interest rate set by the Bank of England. It influences borrowing costs across the UK. It is used by banks as a benchmark for setting interest on loans, including on mortgages.

A higher base rate generally leads to higher mortgage interest rates. A lower base rate makes borrowing cheaper. The implications for home buyers are that changes in the base rate can alter your monthly payments and overall affordability. Base rate fluctuations also contribute to economic uncertainty, which is why you should choose products that suit your risk tolerance.

A fixed rate provides payment certainty and is useful when interest rates are predicted to rise, but there’s usually a lack of flexibility. Monthly payments remain fixed until an agreed date, no matter what happens to the base rate. Fixed rate periods usually last two, three or five years. This means you may have early repayment penalties if you exit before the term ends.

For example, Angela is a 35 year old nurse based in Birmingham and a single mother. She earns £30,000 a year and has managed to save roughly £20,000. She’s looking to buy a modest suburban property valued at around £150,000. It has to have at least two bedrooms, one for her and one for her child. Given her tight budget, she needs a mortgage with predictable fixed monthly payments so she can plan her expenses with confidence.

Stability is key as she wants to ensure she can meet all her financial obligations while providing a secure home for her child. Angela selects a 35 year mortgage term because a longer term lowers her monthly payments. She chooses a three year fixed rate at 5% to lock in her monthly payments. This allows her to budget reliably around her nursing salary and childcare costs.

Standard variable rate, or SVR, is a rate that is usually charged by the lender once the fixed term ends. If you don’t opt for another fixed term arrangement, you’ll pay SVR –  a standard variable agreement that tends to move roughly in line with the base rate. All mortgage providers have a standard variable rate, but many people choose a new mortgage product rather than moving onto the SVR. It’s generally the most expensive rate offered by lenders and may increase unexpectedly. But a standard variable rate is usually flexible, meaning there are no early exit fees when switching deals.

A discounted rate usually offers a discount off the lender’s standard variable rate. This can be more affordable in the short term. However, rates may rise if the lender’s SVR increases. Discounted rates often come with restrictions on repayment or remortgaging during the discount period. A tracker rate has a transparent structure and is linked to the Bank of England base rate. If that rate falls, your payments reduce automatically, but if the base rate rises, your monthly payments will increase. Variable rate mortgages, including trackers, are less predictable when you’re budgeting compared to fixed rate options.

In summary, fixed rate mortgage deals lock in a rate based on current and predicted base rates. They provide stability if the base rate rises later. The base rate influences variable mortgage payments directly affecting mortgages that track or are linked to the base rate. Different types of mortgages come with their own tradeoffs between cost, certainty and flexibility. The best choice depends on your income, savings and appetite for risk. By understanding how the Bank of England’s base rate shapes mortgage options, you can pick a product that not only gets you onto the property ladder, but also fits your lifestyle and future plans.

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