Mortgages

Should I Choose Fixed or Variable Rate Mortgages?

There are lots of different options when it comes to mortgages and it is a good idea to make sure that you have a good understanding of the differences between them so that when you are choosing what you want, you know that you are making a suitable choice. It might seem confusing and complicated but it does not have to be and if you have a methodical approach you should be able to get to grips with it.

Fixed Rate

A fixed rate mortgage will have an interest rate that does not change for a certain period of time. This period of time will be different depending on the lender you use, but it is likely to be a number of years and it could even five or ten years. The advantage in having a fixed interest rate is that you will always know how much you have to pay and then you will be able to prepare and budget for that. Otherwise, if the interest rates get put up, it means that you will have to find more money to be able to make your monthly payments. For some people this will be easier than others. If you often find it difficult to manage your repayments anyway, then it could be wise to fix the interest rate and then you will be guaranteed to know that you will not be paying more money for a while at least.

Variable Rate

A variable interest rate will be able to change at any time. Lenders can choose when they do it, although it could be most likely to happen if the Bank of England changes their rate. There is also a bigger chance that they will put up the interest rates than reduce them, as they will have expenses to cover and will be more likely to need more money from you rather than less. There is a chance that the rate might go down though and this is one advantage of going for a variable rate. It is also worth noting that the rate might be lower to start with as a fixed rate tends to be a dearer option when you are comparing the two before you choose. It is worth checking and this may not be the case with all lenders so you will need to check carefully.

It is important to think about your own situation when you are choosing which of these you think will be the best for you. You need to consider whether you can afford any potential rate increases to start with. Make sure that you carefully work out how much you can afford to pay and whether you would still be able to manage to cover all of your other essentials if you had to pay more for your mortgage. If you have a repayment mortgage, then the increase will not be made to the amount you repay only to the interest portion so it is worth bearing that in mind – so if rates go up by 1% you will not pay 1% more than you were before, only 1% more interest. If you are on an interest only mortgage then you will pay 1% more. So, make sure that you actually do some calculations and this will help you to know for sure what the right decision will be. You may also be tempted to think about whether you feel that rates will go up or down in the near future. This can be tricky though; it is not easy to make predictions. You may feel if they are really low, then they cannot go down any more and will have to go up but rates have gone down lower even after being at historical low levels for a long time. So, it just shows you cannot easily predict what might happen so you need to be careful with this approach.