With the huge increase in interest rates, almost daily we are being asked whether it is a good idea to take a variable rate mortgage rather than a fixed rate mortgage. There are benefits to both options, but first you need to understand what each one means, in order to understand which one will work best for you and your finances.
What is a fixed rate mortgage?
A fixed rate mortgage means the interest you’re charged on your loan will not change for the ‘fixed’ period of your mortgage. Because your interest rate doesn’t change, your monthly mortgage repayments will remain the same through the duration, whether this is a 2-year, 5-year, or 10-year fixed-rate.
Fixed rates ensure you have stability over your mortgage payments and for a defined period of time you will know what you are paying. If the Bank of England base rate were to change your payments would remain static whilst you are ‘fixed’ into your deal, however if interest rates fall, you won’t benefit.
What is a variable rate mortgage?
There are different types of variable rate, but most work by ‘tracking’ the Bank of England base rate, often called a ‘tracker mortgage’. With a variable rate mortgage, your interest rate will change over time; if the bank’s base rate goes up as it has been recently, the interest rate on your mortgage will too, meaning your monthly repayments will increase.
However, if and when the banks base rate begins to decline, your interest rate will too and so will your mortgage repayments.
So with everything going on, should I choose a fixed rate or variable rate mortgage?
We are seeing that variable rate mortgages are currently much lower than the fixed rates on offer, so do these provide better value for money now?
As the main difference between a fixed and tracker rate is if the Bank of England base rate changes the rate you pay for your mortgage will change too, this gives you no certainty or stability over your monthly payments.
With tracker rates currently lower than fixed rates, these could provide a shorter term affordable option, however with continuous increases to the Bank of England’s base rate, you could find yourself paying more than you would have done if you had fixed your mortgage. However, if the base rate plummets, you’ll find your mortgage repayments will too.
Ultimately, variable rates are currently cheaper but not without risk. The type of mortgage that is best for you will depend on your own circumstances and attitude towards risk. If you’re looking for certainty in knowing what your mortgage will cost each month, then a fixed rate mortgage is likely to be the better option.
Please just give us a call and we can discuss all available options with you. We want to be sure you fully understand the type of mortgages that are available to you, and ask you to contact us if you have any specific questions you’d like to discuss.
