With the vast amount of mortgage options currently out there in the market at the moment, deciding what type of mortgage you should get is no small feat. In 2022, with the cost of living crisis causing households all over the UK to really feel the pinch, it’s even more important to ensure that you choose the mortgage that is going to work best for you.
In this article, we’re going to talk through the different types of mortgages available, what’s good about them and what to look out for in 2022.
Should I get a fixed rate mortgage?
We are currently in a period of rising energy, food and fuel bills. Alongside this, mortgage rates have also risen recently and for those on variable or tracker mortgages, this is likely to have resulted in higher monthly mortgage repayments. For this reason, a fixed rate mortgage may start to look like a more attractive option in 2022.
A fixed rate mortgage deal will generally be a little more expensive than a tracker or variable rate facility initially, however it provides peace of mind that your mortgage repayments and interest rate will stay the same for the duration of your deal; be that 2 years, 10 years or anywhere in between.
This will allow you to budget for one of your biggest household expenses each month with no surprises, which could be a welcome relief, especially at a time when other bills are rising and money can feel a little out of control.
Find out more – ‘What is a fixed rate mortgage?’
Should I avoid tracker mortgages?
Tracker mortgages have an interest rate that moves up and down in line with the Bank of England’s (BoE) Base Rate. For instance, a lender may offer a tracker mortgage which always remains at 0.75% above the BoE Base Rate. This means that if the BoE Base Rate increases, so too does your mortgage interest rate and your monthly mortgage repayments. In turn, if the BoE Base Rate decreases, your mortgage interest rate and your monthly mortgage repayments would decrease.
In May 2022, the BoE Base Rate increased from 0.75% to 1%. This was the third increase so far this year. Each time this happens, the interest rate and therefore the monthly repayments on any tracker mortgages will have increased too. That being said, tracker mortgages do often start out with a lower interest rate than fixed rate mortgages, and for this reason, a tracker mortgage may still be a good option for you. It will depend on your personal finances and whether you have sufficient spare income to cover any repayment increases.
Of course, tracker mortgages come into their own when interest rates are falling. This is because borrowers can immediately benefit from lower interest charges with each reduction in the Base Rate. If the UK economy should start to fall into a recession, then the Bank of England may decide to reduce its Base Rate to try to stimulate economic activity and this would then benefit borrowers with a tracker facility. We wouldn’t generally recommend speculating on likely economic trends when choosing a mortgage facility, however.
What are the other types of mortgages?
Of course, there’s a lot more than just fixed rate and tracker mortgages out there on the mortgage market. Let’s run through a few of the other types of mortgage that you might come across.
Standard variable rate mortgages
Standard variable rate mortgages are similar to tracker mortgages in that the interest rate – and therefore your monthly repayments – can change at any time. The interest rate is charged and referred to as the standard variable rate (or SVR) and it’s generally the rate that you’ll be moved onto once any fixed, tracker or discount mortgage deal ends.
The SVR is set by your mortgage lender. Lenders will generally try to keep their interest rates stable and competitive, but ultimately rates can change at any time in line with market forces such as the BoE Base Rate and the lender’s own appetite to lend.
The good thing about standard variable rate mortgages is that they are flexible. You can generally cancel your mortgage deal at any time and move to a different deal or lender without being hit by penalty charges. You can often also make overpayments, make lump sum reductions or apply for repayment holidays if needed. Therefore, standard variable rate mortgages can be a good option if you have the financial means to be able to deal with any potential fluctuations in interest rates.
Find out more – ‘What is a standard variable rate mortgage?’
Discount mortgages are another type of variable mortgage. A discount mortgage offers a discount off the lender’s SVR for an initial fixed length of time, typically 2-3 years. Let’s say for example that your lender’s SVR was 3% and your discount mortgage came with a 1.5% discount. You’d only pay 1.5% interest on your borrowing for that initial fixed period.
It’s important to note that discount mortgages still have a variable rate. This means that your monthly repayments can go up or down at any time depending on the lender changing them. You will, however, get a discount off the standard rate for your fixed period.
Offset mortgages link your savings to your mortgage to offset one against the other. The amount you have deposited with the lender as savings is deducted from the amount owing on your mortgage and you pay interest on the difference.
For example, if you have £10,000 in savings and a mortgage borrowing of £200,000, you’ll only pay mortgage interest on the net balance of £190,000.
The idea of an offset mortgage is to reduce your mortgage interest charge and therefore your repayments by using your savings to reduce your net balance. You still have access to your savings at any time, but whilst they are available, you can use them to reduce your mortgage charge. It is important to note, however, that you won’t earn interest on the savings that you have with the lender and these mortgages also tend to attract slightly higher interest rates.
Find out more – ‘Different types of mortgage’
Speak to a mortgage advisor
No matter which mortgage you think might be right for you, we would always recommend speaking to a mortgage advisor before making a final decision. At Mortgage Light, we are experts in the mortgage market with a passion for helping people find the right mortgage for them. We’re constantly abreast of all market changes and are able to offer unbias and informed advice on the type of mortgage you should get in 2022 and beyond.
Speak to one of our friendly advisors today and let us help you. Call 01908 597655 or contact us via our website.