The Variable Rates
Discount or Tracker
A degree of risk?
Discount rate, Tracker, Discounted Tracker, Stepped discounted Tracker, is your head spinning yet? Forget the different names, they are all variable based products with a subtle difference from one another. The similarities though are the fact that the product rate can fall or rise should the market rates and/or Lender rates change. A discounted variable rate is a product that offers a cost saving or discount from the Lenders Standard variable rate. If during the special rate term the Lender changes their SVR either up or down, then the rate will follow (the discounted amount remaining unchanged). With a Tracker, the product is based upon the Bank of England base rate and if the Bank change their rate then the product rate also changes by the same margin. Its quite usual for variable based products to offer the most competitive options available, but it comes with the added risk that the rate can increase, and therefore your affordability should be able to accept the potential for your Mortgage payments to increase. Many variable based products have redemption periods just like the fixed options, so be sure to ask about these and understand them. Variable products with no redemption terms imposed can be arranged, but this usually comes at the expense of higher interest rates.
If the Bank of England rate raises?
Expect an increase, immediately!
Then irrespective of the type of variable rate you have you will likely see an increase to your Mortgage payments almost immediately. Lenders tend to increases their Standard rates in line with Bank of England increases, and if you are on a Tracker rate your rate will most likely be increased the following working day.
Consider a drop lock Mortgage
Currently a popular choice
It's not always so clear cut with Mortgages, as even though the idea of a fixed rate is comforting, you sometimes also want to benefit from rate reductions especially when it's speculated by the Media that the Bank are aiming to make further cut's to aid our economy. Consider the 'drop-lock' Mortgage. This is where the Lender offers you a Tracker rate with the option to change during the penalty period to a fixed rate option without facing any penalty. It offers the best of both worlds!
Can my rate reduce?
Yes, but it can increase also!
It depends on the type of variable rate you have chosen. Usually with a Bank Base rate Tracker if the Bank of England reduces their rate, then your product rate will reflect these changes the following day. If you have a Variable discounted rate, there are no rules that say a Lender must change their Standard rate just because the Bank of England decide to lower theirs! This means you may not see the benefits of a Bank of England rate reduction.
Disclaimer
James Raynor is Authorised and Reulated by the FSA (463141). You may be charged a fee for the processing of your application and this fee and we estimate that this fee will be £195. Your Home is at risk if you do not keep up the repayments of a Mortgage or any other loan secured against it.
