Bennison Brown | Product Types - Pros and Cons

Product Types - Pros and Cons

In the main, mortgage products will fall into one of two categories, fixed or variable rate deals. Historically, the difference in flexibility between the two types was significant but in recent years, the difference has reduced substantially.

To generalise, fixed rates tend to be more secure but less flexible. Whereas, variable rates tend to be more flexible but less secure.

Variable Rate products used to carry unlimited overpayment allowances and no tie in periods or Early Repayment charges. This meant that they were extremely flexible and you could pay huge chunks off at a time or redeem the mortgage early with no consequence. The trade-off for this level of flexibility, is the risk you take on the risk of rates increasing. These days however, although that is true of some products on offer, quite a good share of the Variable Rate based products on the market will now carry the same Tie In restrictions as Fixed Rate products.

Fixed Rate products will almost always carry Early Repayment Charges and Tie-In periods. They will usually restrict overpayments to 10% of the balance per annum.


Fixed rate

During the fixed rate period, the interest rate of the product that you have chosen will remain the same, regardless of changes to the Bank Of England Base Rate (BOEBR) or the individual lenders Standard Variable Rate (SVR).

This product tends to be suitable for a client who is cautious and likes to know their exact monthly outgoings and have no immediate changing life plans. Similarly, if you think interest rates will rise in the near future, a fixed rate deal would protect you against that. However, while you are protected if rates go up, you could also end up paying over the odds if interest rates fall during the fixed rate period. This is the risk of buying into a safer product.


This type of rate does have its restrictions. Most fixed rate mortgage products will have Early Repayment Charges which penalise you for repaying the mortgage early or going above your annual allowance of overpayments.

Typically, your overpayment allowance is set at 10% of the mortgage balance each year.

The majority of deals that are available on the market today are on a fixed rate basis.


Pros

  • Stable rate
  • If rates rise, your rate is safe
  • Common – available from most lenders
  • If rates fall – you won’t benefit

Cons

  • If rates fall – you won’t benefit
  • Early Repayment Charges or tie in periods

Discounted Variable

Discounted variable mortgages are a form of a variable rate mortgage, whereby the lender offers a discount on a certain rate, most commonly the lender’s own SVR, in the form of an introductory term. So, for arguments sake, if a lender offers you a 3-year 2.00% discounted Variable rate based on their 5.00% SVR, your pay rate would be a 3.00% and this promotional rate would last 3 years.

There are possible advantages to getting a Discounted Variable Rate. Predominantly, it means that your rate could go down over time if the landers SVR drops. This will depend on the wider economic situation – if the mortgage market becomes more expensive during the term of your product, the lender may decide to increase their SVR rate and therefor your rate would increase.

This type of rate inherently carries more risk as it is possible for payments to rise.

Another feature of this type of product is that they will sometimes not carry the same tie in terms such as Early Repayment Charges so if you get nervous about rate rises, you can change into a more secure Fixed Rate if you wanted to.

Variable rates overall are also more likely to have unlimited overpayment allowances too. So, if it’s very important for you to be able to make use of high bonuses or use an expected inheritance to reduce your mortgage balance considerably, without penalty, it may be worth considering this type of mortgage product.

Pros

  • Tends to be more flexible
  • If the lender reduces their SVR – your pay rate falls too
  • Rate can change at any time

Cons

  • Rate can change at any time

Tracker


Another form of Variable rate. This type of product comes with a rate that tracks above and moves up and down in line with changes to a particular interest rate. Usually the reference point is the Bank of England Base Rate (BOEBR), meaning that your payments can fluctuate based on a measure that may be a bit easier to predict than your lenders internal decisions.

If a lender offers a Tracker rate of 1.65% above Base Rate and the current BOEBR is 0.75%, this means that the rate you will be paying will be 2.40%. The rate you pay will then follow the Bank Of England Base Rate up and down whenever that is reviewed.

The Monetary Policy Committee (MPC) who oversee the Base Rate, meet 8 times a year so in theory, it is less likely to change as often as a lenders SVR could and so can be viewed as potentially less unstable. It’s important to take a wider view on the economic condition when assessing what you think this rate will do. We are currently seeing a Base Rate that is the lowest it has been since records began in 1694. If you take the last 20 years, the highest it’s been is 6.00% and the lowest is the current rate of 0.10%.

Some Tracker Rate mortgages will come with a collar or cap. A mortgage collar refers to a minimum set rate that your mortgage won’t be able to go under, while a mortgage cap is a maximum ‘ceiling’ rate. The best tracker mortgages for the more risk-averse borrower may be those with a cap, rather than a collar, but unfortunately capped mortgages tend to be very rare.

On the other hand, because you’re taking a bigger risk, mortgages with a collar or no outer limits at all will likely come with lower rates than those few mortgages that have a cap. Another feature of this type of product is that they will sometimes not carry the same tie in terms such as Early Repayment Charges so if you get nervous about rate rises, you can change into a more secure Fixed Rate if you wanted to.

A Tracker is the most common type of variable rate amongst your most recognisable, high street lenders.

Pros

  • Typically stable – depending on wider economic situation
  • If the reference rate falls – so does your rate
  • If the base rate rises, so does your pay rate

Cons

  • If the base rate rises, so does your pay rate

Contact us today


Whether you are a first-time buyer, looking to remortgage, moving up the property ladder or buying an investment property, now is a great time to contact us.

Your initial mortgage review is completely free of charge, meaning you can talk to one of our experienced mortgage advisers today to see how we can help you without making a financial commitment.

If you do not keep up with your mortgage payments your home may be repossessed.

Article by Chris Billingham

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Chris Billingham

Mortgage Adviser

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