Is a Fixed or Variable Rate Mortgage Better?
There are many different types of mortgage and it can be confusing knowing which one is going to be the best choice for you. There are differences between all of the mortgages available of course, but there are also some big differences between certain types. It can be good to know what these are and understand what they mean first and then this will help you to reduce your choice of mortgage and pick the one that will be the best for you.
Fixed Rate Mortgages
A fixed rate mortgage is one where the interest rate is fixed for a period of time. It is unlikely that it will be fixed for the whole term of the mortgage, but you will get a fixed rate for a certain number of years. This will vary depending on the mortgage provider but tends to be between one and five years. The fixed rate might be higher than the variable rate that is being offered.
The advantage of having a fixed rate is that you will know how much you will have to pay each month. There will be no need to be concerned about whether the rate will go up and make it hard for you to pay. These are especially good if you are quite stretched financially anyway and you feel that any increase in mortgage payments will be too much for you to manage. It is therefore worth calculating whether you are likely to be in this situation by looking at your bank statements and seeing how well off you expect to be. If you are taking on a mortgage for the first time, then it could be tricky to calculate this, particularly if you have not had your own home before as knowing how much all the other bills will be is hard to estimate. However, you might be able to have a go or you may feel that it will be better to get a fixed rate, so you at least know where you stand with one of your expenses.
It is worth noting that often with a fixed rate mortgage, you will be tied in and this will mean that you will be committed to staying with that lender. You may be tied in beyond the fixed rate period as well, meaning that you will have to be on their variable rate for some time. It is well worth checking whether this is the case. This could be a problem if interest rates fall or there are more competitive mortgages available as you will not be bale to move and take advantage of them. Some will let you move, but they will charge you a lot of money to do so. You may even find that this could be a problem if you move house, particularly if you downsize and want to reduce the amount that you are borrowing as they may not let you pay some off either due to the same penalty or condition. Therefore, make sure that you check first.
Variable Rate Mortgages
A variable rate mortgage can normally change at any time which means that you have no security with regards to knowing how much you will be paying month to month. However, you are generally free to change mortgage providers, which means that they will not want to make changes that are too drastic as they know that you will go elsewhere. If you get a tracker rate, then this has to track the base rate and so they will not be able to change the interest rate whenever they wish but only when the base rate changes. This can make things a bit more predictable and protects you form the mortgage lender just randomly putting up the mortgage.