When you come to decide on your mortgage offers, one of the decisions will be whether to choose a fixed or variable rate mortgage. We explain below the difference between fixed rate vs variable rate mortgages.
Fixed rate mortgages
With a fixed rate mortgage, the lender agrees to give you a mortgage at a specific interest rate for a fixed length of time. Fixed rate mortgages come in the options of two, three, five, 10 or 15 years.
The main advantage of having a fixed rate mortgage is that you know exactly what your mortgage will cost each month. Your payments will also remain the same, no matter how high the interest rates increase. The disadvantage of a fixed rate mortgage is that if the interest rates fall, your payments will remain the same.
Usually a five-year fixed rate will have a higher rate than a two-year fixed mortgage however the gap in rates between the two have been closing over recent years. We have seen an increase in clients taking five-year fixed mortgages as they can take advantage of cheaper rates.
Variable rate mortgages
With a variable rate mortgage, the rate can move up and down and is based on the changes to the UK economy. If interest rates go up, it usually means people are less likely to borrow to spend. In economy downturns, interest rates are often cut to encourage spending. Variable rate mortgages come in three categories: trackers, standard variable rates (SVRs) and discounts.
Tracker mortgages are when the rate tracks a fixed economic indicator (usually the base rate). They are popular during times of low or falling interest rates. Tracker mortgage rates usually track above the base rate.
Standard variable mortgages (SVRs) are set by the lender and usually follow the Bank of England’s base rate movements. SVRs can be anything from two to five percent above the base rate and can vary between lenders. They are the rate that most borrowers end up on after the end of an incentive period such as a two-year fixed rate.
Discount rate mortgages usually offer a discount off a lender’s standard variable rate (SVR) and usually last for a short period of time (two to three years).
Choosing between a fixed and variable rate mortgage
We like to advise our clients to think of a fixed rate mortgage as an insurance policy against hikes and so these give them more peace of mind. We wouldn’t advise someone who could only just afford their mortgage repayments to go on a variable rate mortgage because it would be too risky. They would benefit more from a fixed rate mortgage. Other clients who may have spare money over and above their mortgage may suit a variable rate mortgage and it may therefor work out cheaper in the long run.
To arrange a free, no obligation call with us to discuss the mortgage options available to you, please get in touch.
*Please note: Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.