Mortgages

Is it Best to get a Fixed or Variable Rate Mortgage?

There are lots of decisions to make when you are choosing a mortgage and one of the main ones is whether you should choose between a fixed rate or a variable rate mortgage. This can be quite an important decision and it is worth giving it a lot of thought.

A fixed rate mortgage means that the interest rate that you pay is fixed for a certain period. This could be a few years or longer, but normally would not be more than five years. The lender tends to fix the rate a little higher than their variable rate so it will be more expensive in the short term. However, if the interest rates go up over the fixed rate term, then you could end up saving money as your rate will not increase. This will depend on what happens to the rates and it can be difficult to predict. Normally a variable mortgage rate will increase when the Bank of England base rate goes up and it could go up at other times as well. If the base rate falls there is a chance the variable rate will also fall but it might not. The mortgage rate changes are down to the lender and they will tend to be more likely to hike it up than lower it, so that they make as much profit as possible. If the rates are low, then you may feel that it is worth fixing because there is a likelihood that they will go up but it is extremely unlikely that they will go down. If the rates are high, then the opposite might be true. This could have an influence on both whether you think that a fixed rate is a good idea and whether you feel that it is a competitive and fair rate or not.

Another advantage of a fixed rate is that you will always know how much you have to repay. With a variable rate, the interest rate could change from month to month and this could mean that the amount that you have to repay will change. If this is decreasing, then that will be great but if it is increasing then it could mean that you will be paying out more each month. If you are finding it difficult to manage your repayments, then having to pay out even more could create a lot of problems for you.

If the interest rate falls then having a variable rate can be a great advantage. You will end up paying less, assuming the lender puts the rate down when the Bank of England puts theirs down. You could save money this way and also have extra money each month to spend or to save. You could even use it to pay off some of the mortgage so that you can become debt free much more quickly. Of course, it is not that easy to predict what the rates may do, often economists, the government or even the head of the Bank of England make predictions about how rates might change, but these are normally only short term predictions and they are not always right. It is much more difficult to predict what might happen further into the future.

With a fixed rate you may be tied in for the term of that rate. This means that you may not be able to change lender or even change the type of mortgage that you have with that lender unless you pay a huge charge. It is well worth finding out whether this will be the case with the fixed rate deals that you are considering. Think about the consequences of being tied into a high fixed rate when there are cheaper deals around and how you might feel about that.

Choosing between fixed and variable rate mortgages is actually very difficult. It can depend on whether you want to know exactly how much you are paying and not have any nasty surprises with rates going up. You may rather try to go for the cheapest variable rate and hope that rates do not go up that much. You may rather not be tied in to a deal, just in case rates go down.

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