How to Choose Between Fixed and Variable Rate Mortgages
There are lots of different types of mortgage and it can be confusing at times knowing which one to choose. One of the main choices that you will be making is between a fixed rate mortgage and a variable rate mortgage. It is important to have a good understanding of what the difference is between the two and then you will be able to decide which will suit you the best.
Fixed Rate Mortgage
A fixed rate mortgage will have an interest rate which does not change for a certain amount of time. This will not normally be for the whole of the mortgage but for a limited time, it could a few years or even five or ten years. The idea of fixing the interest is that if the mortgage rate changes, your rate will not. So, if the Bank of England puts interest rates up, it means that most people will have their mortgage rates put up and they will have to pay more each month. With a fixed rate this will not happen and you will continue to pay the same rate even when others are paying more.
If the rates go down though, you will still have to pay the same rate. Therefore, there is a risk that you will keep having to pay this higher rate. Often with a fixed rate mortgage you will be tied in as well, which means that you will not be able to change to a different lender. Or you might be able to change but pay a really high fee. You therefore need to think about whether you think that it is worth being tied in like this. If the interest rates fall a lot, then you could really regret being in a fixed rate mortgage but if they go up you will be really happy. It can be difficult to predict as well, even if you feel you know the way the market is headed, you never know when something might come along and completely disrupt things.
Variable Rate Mortgage
A variable rate mortgage will change whenever the lender decides to change the rate. This means that it has the potential of being able to go up and down at any time. This is something which can unsettle some borrowers but others are happy with it. It means that if the bank of England puts the interest rates down, then the lender might also put the rate down and you will pay less but of course the opposite can happen to. Unless you have a tracker, the lender does not have to follow the Bank of England’s rate and so there is no guarantee that it will go up or down. However, realistically it is likely that the lender will put the rates up when the Bank of England puts rates up but sometimes they do not lower it when it puts rates down.
Choosing can be tricky. If you are being very stretched financially just finding the money to pay the mortgage then fixing the rate will mean that you will know that you will not have any nasty surprises and suddenly have to end up paying out more money than you were intending to. In this case it could be reassuring and helpful to get a fixed rate mortgage. However, if you can afford to pay a bit more if necessary and you feel that rates could fall and want the flexibility of being able to switch lenders, then a variable rate could be better. Also if you want to ensure that your variable rate will go down if the Bank of England lowers the rate then it could be worth considering a tracker, but you will need to check carefully whether this will be worthwhile depending on how much the fixed fee is for this.