The world of mortgages is rife with complex terminology and industry jargon. It’s so important to wrap your brain around the different terms before you embark on sourcing a mortgage as you do not want to come unstuck further down the line.
Choosing the right mortgage product for your own individual circumstances is vital. Whatever you do, don’t just do what your mate Jim did, you must get good advice and choose the right mortgage for you.
In basic terms there are three main types of mortgage rates; Fixed Rate Mortgages, Standard Variable Rate Mortgages and Tracker Rate Mortgages. Lets make sure we understand each different rate type before we start comparing. After all, you need to be well-informed to be able to make the best choice for you.
Pretty self-explanatory, your rate stays the same throughout the term so that your monthly mortgage payment is ‘fixed’ and doesn’t change from month to month. In order to mitigate against the risk of interest rates rising during your term, the mortgage provider will likely give you a slightly higher rate so this could be marginally more expensive but you will have the peace of mind that your monthly payment will not go up.
2. Tracker Rate Mortgages
Unlike a Fixed Rate Mortgage, a Tracker Rate Mortgage tracks the Bank of England Base Rate. Your lender will decide how closely their rate will track the Base Rate but essentially, if the base rate goes up your mortgage rate will go up and if the Base Rate goes down your mortgage rate will likely go down too. Currently (November 2022) tracker mortgage rates are comparatively low compared to fixed rates so they could be an attractive option if you are prepared to accept that one of the main cons of tracker mortgages is that you won’t be able to predict your future monthly mortgage payments.
3. Standard Variable Rate Mortgages
Every lender has their own Standard Variable Rate (SVR) and for existing customers this may be the rate your mortgage will move on to when you current mortgage term expires. The rate is fixed by the mortgage lender but it is variable which means that it can change from month to month and therefore your mortgage repayments would also be changeable. The SVR has historically been more expensive than a fixed rate and usually reflects any changes in the Bank of England Base Rate. i.e. if the Base Rate goes up the SVR is likely to go up as well.
This blog is all about comparing Tracker Rate Mortgages and Standard Variable Rate Mortgages as, whilst both these mortgage rate types are variable, it is important to understand that they are very different things.
A Tracker Rate is linked to the Bank of England Base Rate whilst a Standard Variable Rate is set by the lender
Fundamentally, the difference between a Standard Variable Rate and a Tracker Rate comes down to the fact that one rate ‘tracks’ the Bank of England Base Rate (i.e. if the the Base Rate increases by 1% a Tracker Rate Mortgage will also increase by 1%) whereas a Standard Variable Rate does not necessarily bear any relation to the Base Rate but instead, is decided by the lender. That being said, it is likely that a lender would also vary their Standard Variable Rate in accordance with any Base Rate changes, but they don’t have to and they don’t have to stick to a set percentage increase/decrease month on month.
A Tracker Rate Mortgage will likely have a more favourable rate than a Standard Variable Rate Mortgage
Remember, a Tracker Rate Mortgage is one that a lender will offer to a new customer or someone who is remortgaging. It needs to be competitive enough that you might want to choose it and then stay on it for a year or more. A Standard Variable Rate Mortgage is one where your previous term has ended and you have automatically rolled onto this rate therefore, it is likely to be far higher than a Tracker Rate. (This is the main reason why it is essential to get your remortgage rate sorted in plenty of time to avoid paying a higher rate).
Remember that all three types of mortgage could carry an early repayment charge (i.e. if you wish to pay it off before the end of the agreed fixed period you may incur a penalty fee), this will be dependent on the terms of the specific mortgage lender you choose.
If you want to get the lowest mortgage rates available, it’s always best to use a whole of market mortgage broker who can find you a better deal. That said, it won’t always be the best plan to go with the lowest mortgage rate, there are fees, early repayment charges and much much more to consider.
Hopefully this has been helpful in breaking down the key differences between these two types of variable rate mortgages.
If your brain is still scrambled and you’d like to speak to a human being to answer some further questions, don’t hesitate to give us a call on 0330 122 9920. We are always happy to have a chat, free of charge, and point you in the right direction.
We are Hudson Rose, a whole of market mortgage brokerage with over 16 years of experience in advising people on how best to fund their next house purchase. We like to think we’re a bit different. You won’t find any suits or ties in our offices. We’re relaxed and approachable but uber professional. Check out our 5 star google reviews.