Variable Rate Mortgages PDF

Terms for subsection: A. Variable rate mortgages Term: 01. Lender’s standard variable rate Introduction Lenders will keep their product range under constant review Competition and demand have resulted in wide range of options being available The suitability of each option depends on the needs and ci...

Terms for subsection: A. Variable rate mortgages Term: 01. Lender’s standard variable rate Introduction Lenders will keep their product range under constant review Competition and demand have resulted in wide range of options being available The suitability of each option depends on the needs and circumstances of an individual borrower and the prevailing economic conditions Lender’s standard variable rate Most popular mortgage type Very straightforward, typically no product fee and no early repayment charges Rate of interest charged will vary during term Lenders review and set rates periodically taking account of: Competitors rates Bank of England Base Rate (BOEBR) set by Monetary Policy Committee (MPC) of Bank of England The MPC reviews the base rate 8 times a year Roughly, every 6 weeks Some lenders will not follow changes in BOEBR exactly If the income flow from savers is good the lender may be able to hold off any rate change for weeks/months and even then they may not pass on full increase to borrower Changes in rates that lender experiences to raise lending finance For example, in the wholesale money markets Some lenders set interest rates depending on the amount borrowed Standard variable rate is regarded as the standard mortgage type and other products are a variation of this As interest rates fluctuate and are unpredictable some people prefer a less volatile rate even if this means paying a little more for this security For this reason many borrowers choose fixed or capped rates Recommended Reading: Variable Rate Mortgages Lloyds TSB - Standard Variable Mortgage Rate Uswitch – Fixed or Variable rate Money Saving Expert – What Type of Mortgage Term: 02. Discounted and cashback mortgages Discounted mortgages A discounted rate (or discount) mortgage is a variable rate loan with interest set at a specified percentage below the standard variable rate for a fixed time At the end of the period the mortgage returns to standard variable Advantage that borrower pays a lower rate than they otherwise would in the discount period Meaning payments are lower than on a standard variable rate mortgage Many lenders have offered discounted rate mortgages with ‘teaser’ rates Designed to attract borrowers who are looking to minimise their outgoings for an initial period For example, in November 2021 it was possible to arrange a discounted rate of 0.51% for two years when the lenders standard variable rate was 4.35% A borrower will nearly always have to pay an initial fee to access a discounted rate It may also be a requirement that the borrower has to pay an early repayment charge if the mortgage (or part of it) is repaid during the discount period A discounted mortgage is not suitable for those who require the certainty of knowing they will not be affected by interest rate increases The best method of comparing between different products is the APRC When assessing an application for a discounted rate mortgage the effect on payments once the discount ends must be taken into account Treated as committed expenditure Can be difficult to assess as interest rates will vary May be subject to payment of a product fee and possibly early repayment charges If all or part of mortgage repaid within specified number of years Cashback mortgages Cashback is an incentive to new borrowers It is usually a percentage of the amount borrowed and rates can be from around 3% to 6% of the amount borrowed Lender may offer a larger cash back with a higher rate or a lower cashback with a lower rate To prevent the borrower taking the cash and then moving to another lender for another reward there will be a period where some or all of the cash would need to be returned if some or all of it is paid back early Marketed as a product but cashback is a product feature Can apply to fixed and variable mortgages depending on lender Cashback mortgages were very popular at one time In recent years low interest rates and conditions in the mortgage market have limited lenders’ ability to offer large cashbacks Now fewer offers and for lower amounts than in previous years Recommended Reading: Discounted Mortgages Which? - Discounted rate mortgages Nerdwallet – Discounted Rate Mortgages Newcastle Building Society - Mortgages Explained Moneyfacts - Best Discounted mortgage Cash Back Mortgages Go Direct - Cash Back Mortgages Explained Money.UK - Best cashback mortgage Term: 03. Tracker mortgages A tracker mortgage is a variable rate mortgage with an automatic link built in, so that the interest ‘tracks’ an index that is representative of market interest rates, such as the Bank of England's base rate or the Sterling Overnight Index Average (SONIA) SONIA is based on market transactions and reflects the average of the interest rates that banks pay to borrow sterling overnight from other financial institutions and other institutional investors Many lenders who offer tracker mortgages now use SONIA as a benchmark interest rate Previously many lenders tracked the interest rates on their products with reference to the London Interbank Offered Rate (LIBOR), an international benchmark interest rate Since January 2022, lenders have not been permitted to use LIBOR as a reference rate. It may continue to apply as the benchmark rate for existing mortgage contracts. Tracker mortgages are designed to move as the index moves, usually after a period of, say, 15 days Several lenders now advertise their standard variable rate mortgage products as tracker products Recommended Reading: Tracker Mortgages USwitch - Compare the most popular tracker mortgages Money Facts - What is a tracker mortgage? Equifax – What is a Tracker Mortgage