How Will Interest Rates Affect My Mortgage?
With interest rates rising again, Conveyancer Katie Holmes looks at the different types of mortgages and how the rising interest rates might affect them….
Fixed-Rate Mortgage
On this type of mortgage you have no immediate concerns. Your mortgage rate and monthly repayments remain the same for an agreed period of time, irrespective of current interest rates.
However, once the fixed-rate period ceases, you will start paying your mortgage lender’s Standard Variable Rate (SVR), which is determined by the Bank of England base rate. When the base rate rises, it is highly likely that you will have to pay a higher interest rate on your mortgage. This will increase your monthly payments.
Discounted, Tracker or SVR Mortgage
Discounted mortgages provide a fixed discount on the lender’s SVR. For example, they may offer you 1% off the normal SVR. However, the vulnerability remains, in that if the SVR increases, so will your discounted rate.
Tracker mortgages are another form of variable rate mortgage, but they are directly linked to the Bank of England base rate. A tracker mortgage could be higher than the base rate, or at a discounted rate of interest. Typical tracker mortgages, for example, could be set at 1% above the Base Rate. A vulnerability remains, in that the mortgage rate could change at any time and your monthly payments could go up or down throughout the term.
Interest-only or Repayment Mortgage
Via this type of mortgage, you only repay interest on the loan. The actual capital is repaid at the end of the mortgage term. As the capital is only repaid at the end of the term, your monthly repayment rates will usually be lower than a repayment mortgage, in which you pay both the interest and the capital monthly and over the course of the mortgage term. Via the interest only option, the proportion of interest you pay decreases, as more balance is paid off. However, this therefore means that in the early stages of the mortgage term, you will be very vulnerable to any increases in interest rates.
How Can Timms Help?
At Timms, we recognise that the process of obtaining a mortgage is a major life event, which can feel somewhat overwhelming at times. When you are purchasing a property with the benefit of a mortgage or even re-mortgaging your current property, we produce detailed mortgage reports, which clearly explain the term, interest rate, and mortgage repayment type.
For further information, please contact any of the Conveyancing team on freephone 0800 011 6666 or via email at legal@timms-laws.com.
July 2023