From standard variable rates to cashback remortgages there are numerous ways the borrower can go about refinancing the loan on their home. Here is a simple guide to the basic options. Standard Variable Rate: The SVR is most basic form of all remortgages that a borrower can arrange. The SVR is generally linked to the Bank of England interest rate or base rate as it is referred to on the News. SVRs do not mirror exactly the Bank of England rate but they follow its direction – a 0.5% fall could mean a 0.4% fall for the mortgage rate. In recent times the SVR has moved far less than any Bank of England rate changes as mortgage lenders are unable to raise funds as cheaply as they were a year ago. Tracker: Trackers follow the base rate exactly. Rates tend to be between 0.5% and 1% above the Bank of England’s base rate. It is not uncommon for products to have a collar – this is a minimum level below which the rate will not drop – say 2%. If rates fell to 1.5% the tracker would not fall below the 2% mark. Discount: This normally takes the form of a temporary discount off the lender’s SVR. In this situation it is the relation of the discount to the SVR that counts – in effect with different discounts it is possible for the rate to be the same. A massive 2.5% discount off an 8% SVR is the same as a minimal 0.5% discount off a 6% SVR – do not be fooled by the larger discount. Fixed: As the name states the interest rate is fixed. There will be absolutely no change for the special rate period (generally 2, 3 or 5 years) and for longer if specifically arranged for. Beware of redemption penalties which will penalise you if you redeem the mortgage before the end of the fixed rate period. You can fix for 10, 15 years or longer and if you are confident interest rates are going to rise dramatically or are sure that the repayments are affordable this is an ideal remortgage option. Capped: This is the inverse of a collar. Capped remortgages see the rate move in realation to the Bank of England base rate, but there is an upper limit (cap) which gives protection. These remortgages prove popular when there is a possibility of a rapid increase in rates but the borrower cannot afford a lengthy fix or the increase looks temporary. Cashback: The lender will offer you cash in exchange for arranging the remortgage. Sums equivalent to 5 – 10 % are not uncommon but this money will be have to be repaid eventually. As a result cashback remortgages charge higher interest rates than standard loans
and will charge repayment or switching penalties if the borrower wants to alter the agreement within a (usually) 5 year time frame.
