Mortgage rates - what are my options?

6 February2009

All mortgages charge interest, but different mortgages do it in different ways. Some deals may offer greater savings but greater risks, while others might offer higher mortgage rates today - but no danger of price increases tomorrow.

Although there are different types of mortgage rates, to some extent they're all based on the Bank of England's base rate - either where it stands now or where it was at the time they were taken out, depending on the type of mortgage. There are three basic types of mortgage: fixed-rate mortgages, tracker mortgages and standard variable rate (SVR) mortgages.

Fixed-rate mortgage

The mortgage rate on this kind of deal is fixed. Take out a five-year fixed-rate deal today with an interest rate of 6% and you'll pay exactly 6% for the next five years.

In other words, the mortgage rates on existing fixed-rate deals reflect the state of the mortgage market at the time the mortgage was taken out, whatever changes the market has undergone since then.

Tracker mortgage

The mortgage rate on a tracker deal will follow - or 'track' - the base rate exactly. When the base rate goes up or down 0.25% (or 0.5% or 1.5%) so does the mortgage rate of every tracker in the country (with the possible exception of tracker mortgages with a pre-determined minimum rate known as a collar / floor).

So the mortgage rate on an existing tracker deal depends heavily on the state of the mortgage market right now. Having said that, the 'margin' (the amount by which the rate on new tracker mortgages will exceed the base rate) does tend to be higher when financial markets are going through troubled times.

Standard Variable Rate (SVR) mortgage

The mortgage rate on an SVR deal will also follow the Bank of England's base rate, but not as directly as with tracker mortgages, as lenders aren't actually obliged to lower or raise their mortgage rate when the base rate changes.

For more on mortgages and mortgage rates, call Think Money on freephone 0800 195 2913.

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