Choosing a remortgage

Remortgage Guide:  #3

Choosing a remortgage

The first decision when choosing a remortgage, is interest-only or repayment mortgage deal. With an interest-only mortgage you are paying off only the interest on the debt, whereas with a repayment mortgage you are paying off some of the debt every month.

Standard Variable Rate (SVR)

Standard variable rate mortgages are the most straightforward mortgage products available. The SVR is linked to the Bank of England (BOE) interest rate, SVRs are generally a couple of percentage points higher than the base rate. The SVR shifts up and down as the BOE rate shifts.

Tracker

A tracker follows the base rate absolutely and will rise and fall in line with the base rate. Some products have a 'collar', which is the minimum level below which the rate will not fall. Lenders can offer 'lifetime trackers' which guarantee to follow the base rate for the duration of the mortgage.

Discount

Discount mortgage rates are set a percentage below the lender’s SVR. It is the interrelation between the two which determines whether it is an attractive proposition. Some deals discount from a tracker rate rather than the SVR. Discounts tend to last for a relatively short period and payments will increase if the Bank of England puts up interest rates.

Fixed

With fixed rate mortgages, the rate agreed is fixed at the beginning of the mortgage term and will remain at this level for the length of the deal. With fixed rates, the interest the lender sets is not always closely aligned to the Bank of England’s base rate. Lenders price their deals according to the cost of the money they buy on the wholesale money markets. Borrowers pay to ‘buy’ a fixed rate because the lender has to secure a matching pot of money to fund the loan.

Capped

Capped mortgage rates move in line with base rate but there is a “cap” above which the rate will not rise. Some deals also have a lower limit or 'collar' below which the rate will not fall whatever happens to rates.

Cash back

A cash back mortgage, is where a lender gives cash back. Generally cash back mortgages charge higher rates than standard loans and have penalties for early repayment.

Current Account Mortgage (CAM)

A current account mortgage combines a borrowers mortgage and current account to give one balance. A standard payment is made every month which is designed to clear the mortgage over whatever term has been agreed with the lender. Any extra money in the account acts like an overpayment which should mean the mortgage is paid off more quickly.

Offset Mortgage

An offset mortgage keeps the mortgage, savings and current account in separate pots. Savings are used to reduce or 'offset' the mortgage. A standard payment is made every month and any savings act as an overpayment, wiping out more of the capital every month helping clear the mortgage early.

Next - #4 Factors to consider when remortgaging