There are many types of mortgage products available for you to choose from. Your choice depends entirely on your circumstances and goals. Fixed rate mortgages and variable rate mortgages each come with their own set of advantages and disadvantages. Read on to know more.
Impact of the Bank of England's base rate on mortgages
Recent rises in the Bank of England's base rate have directly affected mortgage decisions for homeowners. The base rate influences lending rates and shapes the landscape of both fixed and variable-rate mortgages.
Homeowners at the end of their mortgage deal face a new context. Higher rates compared to previous experiences bring a fresh set of considerations.
Fixed-rate mortgages offer a degree of certainty against these fluctuations. Variable-rate mortgages, on the other hand, hold some benefits and risks aligned with rate changes.
Your mortgage options
When choosing between a fixed or variable-rate mortgage, several factors come into play. For a fixed-rate mortgage, the appeal lies in stable monthly payments. This option provides peace of mind, especially in times of rising interest rates.
Variable-rate mortgages, including tracker and standard variable-rate (SVR) options, offer flexibility. They may initially present lower rates, but the risk of rate increases looms.
Your financial situation, risk tolerance, and future plans become the deciding factors in choosing the right mortgage type. Both fixed and variable mortgages have unique features that cater to different needs in the current economic climate.
What is a fixed rate mortgage?
Fixed-rate mortgages involve a mortgage deal where the interest rate remains constant for a set period. This period, normally ranging from two to ten years, offers a stable monthly payment amount. During this term, changes in the Bank of England's base rate do not affect the interest rate of the mortgage.
How fixed-rate mortgages work
The fixed-rate period defines the duration your mortgage rate remains unchanged. The length of this period is important, as it influences your financial planning.
Longer fixed periods offer more stability but often come with higher interest rates. After the fixed term ends, the mortgage usually reverts to the lender's standard variable rate, which might be higher. When nearing the end of the fixed period, start looking for a new mortgage deal.
Monthly repayments: predictability and security
Monthly payments with a fixed-rate mortgage stay the same for the entire fixed term. This predictability aids in budgeting and financial planning, especially valuable in an economic climate with rising interest rates. The security of knowing your exact mortgage payment each month can provide peace of mind amidst financial uncertainty.
What is a variable rate mortgage?
Variable-rate mortgages adjust periodically, reflecting changes in the interest rate. The Bank of England's base rate often influences these adjustments, impacting mortgage costs.
Variable mortgages offer flexibility but come with uncertainty regarding future payment amounts. The rate of change depends on the lender's Standard Variable Rate (SVR) or other index-linked rates.
Types of variable rate mortgages
Standard variable rate (SVR) mortgages
SVR mortgages are a lender's default rate. After an initial deal period, most mortgages revert to this rate.
SVR rates are normally higher than special deal rates and can change at the lender's discretion. Borrowers may face increased payments if the lender decides to raise their SVR.
Tracker and discount rate mortgages
Tracker mortgages directly follow the Bank of England base rate, plus a set margin. These offer transparency but fluctuate with national rate changes.
Discounted variable rates, on the other hand, offer a reduction on the lender's SVR for a set period. They provide initial savings but still carry the unpredictability of variable rates.
Comparing fixed and variable rate mortgages
Advantages of fixed-rate mortgages
Fixed-rate mortgages offer certainty.
Your mortgage payments remain constant for a fixed period providing budget predictability.
A fixed mortgage shields you from the immediate impacts of rate increases, a comfort in volatile economic times.
Fixed-rate deals often cater to long-term planning. They allow you to lock in a rate, securing your monthly payment amount for the agreed period. This feature is particularly beneficial when interest rates are low, providing an opportunity to save over time.
Advantages of variable rate mortgages
Variable-rate mortgages bring flexibility.
These mortgages adapt to interest rate changes and may lead to lower payments when rates fall.
They often have a lower early repayment charge, appealing to those considering property selling or purchasing soon.
Another advantage lies in their initial cost. Variable mortgage rates, particularly tracker and discount rates, can start lower than fixed rates. For homeowners who can manage the uncertainty of fluctuating payments, this could mean initial savings.
Disadvantages of each mortgage type
Both mortgage types have drawbacks.
Fixed-rate mortgages, while stable, can result in higher initial costs. If interest rates fall, you're locked into a higher rate.
Early repayment charges on fixed mortgages can be significant, limiting flexibility.
Variable-rate mortgages, on the other hand, expose you to financial risk. Payments can increase unpredictably with interest rates, straining your budget. This uncertainty can be unsettling, especially in an economic climate with rising interest rates.
Making an informed decision: fixed or variable?
Assessing your financial stability and future plans
Financial stability, often a cornerstone of peace of mind, plays a big role in choosing between fixed and variable-rate mortgages.
If you enjoy a stable and predictable income, a fixed-rate mortgage might align well, offering a sense of security against fluctuating interest rates. If you anticipate a rise in income or possess significant savings, a variable-rate mortgage could be more appealing.
Factor in your long-term goals as well. Are you planning to stay in your home for many years, or do you foresee a move or sale in the near future? A fixed mortgage locks you into a rate for the duration of the deal. Variable mortgages, with typically lower early repayment charges, offer more flexibility for those who might move or remortgage soon.
The role of early repayment charges in your decision
Early repayment charges (ERCs) can be a significant cost if you decide to overpay, switch, or pay off your mortgage during the initial term. Fixed-rate mortgages often come with higher ERCs compared to their variable counterparts. This is because lenders expect a steady return over the fixed period.
If you're a first-time buyer who intends to stay put for a while, the higher ERCs associated with a fixed mortgage might not be a deterrent. However, if you're considering selling your property or might have to move for work, a variable-rate mortgage’s typically lower ERCs could be more appealing. This flexibility can save you money and hassle in the long run.
Financial considerations beyond the mortgage rate
Most lenders include a range of additional costs and fees, which you should be aware of when choosing a fixed or variable mortgage. These can significantly alter the overall affordability of the mortgage. Expect arrangement fees, legal fees, valuation costs, house survey costs and even early repayment charges. Tracker mortgages often come with distinct cost structures compared to standard variable-rate mortgages. These additional costs can make a significant difference in your overall financial commitment.