Category: Mortgages


Fixed vs Variable Rate Mortgages

If you are choosing a mortgage then you will find that there are a lot of options out there. There are many different lenders to choose between as well as many different mortgage types. It can be wise to employ a financial advisor to explain things to you and to help you to decide which is the best. However, to help with some of the basics here is an explanation of the main differences between fixed rate and variable rate mortgages.

With a fixed rate mortgage, the interest rate that is charged on the money that you owe will not change. This means that you will know exactly what your repayments will be as they will not change if the base rate changes. However, it will not be fixed for the full term of the mortgage but for a number of years, this is likely to be between one and five years. It can be useful for those not used to paying a mortgage to know exactly how much money they will be paying each month rather than worrying that the amount may change. It can also be useful in a time when interest rates may rise and this would increase a variable rate However, there are disadvantages as well. You may find that you are tied into to a fixed rate deal meaning that for the fixed rate term you cannot change mortgage companies.

This means that if the rate falls and you find that your fixed rate is far higher than you would be paying elsewhere, you will not be able to move your mortgage. If you have a five year deal and the rates fall within the first year, you will be paying over the odds for a long time. Of course, you will need to think about whether the rates are likely to rise or fall and consider what the rate is and whether it is that far away from the current rate to make it worthwhile.

A variable rate can change at any time. This normally means that the lender can change it whenever they like. Therefore if interest rates go up, they will be able to increase the variable rate right away but if they go down they can choose not to lower them. They can, in fact, change the rates at any time and so they may decide to put them up even if the base rate does not increase. This can lead to uncertainty as you will not know how much you will need to pay each month. However, it is worth remembering that most of what you pay each month is likely to be the repayment of the mortgage rather than the interest and so a change in the interest amount will probably be small compared to the total repayment that you are making. You can also opt for a tracker mortgage where the mortgage interest rate tracks the base rate and only changes when that changes. This could be considered to be fairer and you will find that as rates move up and down your payments change accordingly. The lender will charged a fixed interest rate on top of the base rate so you will need to check this out and see whether you think that it is worth taking out.

So when deciding between a fixed and variable rate you need to consider a few things. You need to think about whether you think interest rates are likely to change in the near future. This can be a hard prediction to make as no one knows what will happen in the future but if you follow economics then you should have some idea of how things have happened in the past, how they are going now and what experts are predicting. If the rate is likely to rise, then you may want to protect yourself by fixing your mortgage rate. If it is likely to fall, you may want a variable rate, but you have to note that even if they do fall, your rate may not automatically fall unless you have a tracker mortgage. You also need to make sure that you can afford a rate increase before you select a variable rate mortgage. As well as the cost you need to consider which you feel will suit you better. You may rather have the peace of mind of knowing exactly how much money is going in and out of your account each month by fixing the rate. You may not want to keep wondering whether the rate may change from month to month and hoping that you will be able to afford it or wondering where you might be able to cut down so you can pay it.

It is worth remembering that your decision is not final though as you can remortgage and change the type of mortgage you have. You may be tied in for a period but you will be free to move after that and you can change the mortgage type if you feel it is the right thing to do.