When faced with choosing between a fixed-rate mortgage or a variable rate mortgage, it can be a difficult decision to make without first doing your research to discover which is the best for you.
You must make the right choice for your mortgage as you may be signed up to your agreement for a long time – potentially for the lifetime of your loan.
In this guide, we will look at your best options for taking out a mortgage to buy a property and the positive and negative points of each choice.
How your mortgage choice can affect you
Choosing between a fixed-rate or a variable-rate mortgage is important because this will refer directly with how much money you will pay back over the length of your mortgage agreement.
You will be charged interest on your mortgage loan and this is calculated as a percentage of the total amount of money you owe. Interest rates are calculated and charged every month. The larger the percentage, the greater the sum of money you will be paying back.
It is important that you understand how managing your mortgage interest rates wisely can save you money. To save yourself the most money you will need to look at the best way to pay the least amount of interest you possibly can over the length of your mortgage term.
If you knew exactly what your mortgage interest rates were going to be for the duration of your loan, then working this out would be easy. However, it is not as straightforward as this. Read on to discover more about variable-rate and fixed-rate mortgages so you can make the best decision possible.
What are Variable Rate Mortgages?
Variable-rate mortgages are loans that will allow for fluctuations on the interest level that you pay out each month.
What this means is that on some months you may pay more for your mortgage repayment, and on other months you may end up paying out a little less. Variable-rate mortgages come in two types: a tracker and standard variable.
- Tracker mortgages: These are fixed to a set percentage at a level above the Bank of England’s base rate of interest – usually set at a percentage or two above this rate. The amount you pay on this option will fluctuate in time with the current UK’s standard interest rate. You may qualify for a discount period with some lenders that will give you a discount off of their standard tracker rate for a limited time.
- Standard variable rate mortgages: These are mortgage loans that will also change over time. How they differ from tracker mortgages is that they are not fixed to the UK’s base rate of interest set by the Bank of England. Instead, the amount of interest you pay on your loan is calculated by the lending party. This means that you may end up paying more or less than you would pay on a different type of mortgage. It can be a bit of a gamble to take on this type of mortgage, but if it falls in your favour, you could end up saving a lot of money. However, should it go the other way, it could end up being more expensive for you.
What are Fixed Rate Mortgages?
Fixed-rate mortgages are a more predictable way to arrange your mortgage. They allow you to set an interest rate at a certain level for an agreed length of time with your lender.
What this means is that your monthly mortgage repayments will be unaffected by the current Bank of England interest rates. Your mortgage lender will not be able to change the interest rate on your loan until after the agreed-upon length of time for that rate has expired.
Fixed-rate mortgages are a good idea for people that need to budget carefully and need to know in advance exactly how much money they will be repaying each month.
Knowing what your repayments rates will be for a determined length of time can also allow you to plan ahead and budget more effectively.
One of the most reassuring aspects of a fixed-rate mortgage is the knowledge that you will not be caught out by any unexpected interest rate rises that could leave you unable to repay your monthly amount in full.
What are the negatives of a fixed-rate mortgage?
While the idea of knowing what you will be paying back each month on your mortgage is good, there is the downside that this type of mortgage offers you much less flexibility.
On taking out your mortgage you will be locked into your agreement for a set length of time. This means that should you choose to switch to a different type of mortgage during this time, your early exit fees could be pretty substantial.
Mortgage lenders will often apply very harsh exit fees to help prevent people from switching mortgages until after their current fixed-rate term has elapsed.
The interest level applied to fixed-rate mortgages is usually worked out by the lender. They will look at several factors before they work out an offer. These may include trying to predict how interest rates may change over the agreed period.
As their predictions are based on guesswork, this can often work out in the favour of the lender.
So, what is better, a fixed rate or variable mortgage? In truth, there is no right answer to this question.
What you may want to consider while making your decision is that the base rate of interest has been continuously dropping since 2009. However, you cannot rely on this factor alone going into the future.
There is still a level of risk involved in either choice of mortgage because nobody knows what will happen to interest rates in the future. A rise in interest rates could see a steep rise in your repayments. Another dip in rates could see you paying out more.
The Small Print
Well, the print is technically no smaller than the rest of the print. But nonetheless, we do feel it pertinent to just reiterate the fact that we’re finance bloggers. We’re not IFAs or qualified mortgage advisers and, as such, if you’re considering your mortgage options, we’d recommend you go speak to a professional.