The Pros and Cons of Fixed Rate and Variable Rate Mortgages
Looking for a mortgage? It’s a complex minefield of options, offers, opportunities and deals. How do you know which is the right one for you? How do you choose, when even the basic information seems confusing or in some form of code?!
Turn to a plain English guide – rather like this one! – that will give you all the information about the two most common types of mortgage available in the UK. Comparing and contrasting the Pros and Cons of the basic types of mortgage will give you the knowledge to better understand the actual mortgage comparison charts.
So, let’s first look at what the advantages and dis-advantages are of a Fixed Rate Mortgage.
A fixed rate mortgage does exactly what its name describes. It fixes the interest rate, and therefore fixes your monthly repayment amounts, at a set figure for an agreed number of years.
People entering into fixed rate deals have a degree of security and peace of mind – their repayments aren’t going to change, no matter what fluctuations happen to the economy or the Bank of England base rate – at least until the end of their fixed rate period!
Most fixed rate deals last from 2 to 5 years, however there are some that extend for longer. It’s well worth shopping around for the best deal, so here’s a few points to remember along the way.
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Pros and Cons of Fixed Rate Mortgage Deals
- You know exactly what your mortgage payments will be
- No rises in your payments makes monthly budgeting easier
- At the moment, some fixed rate deals are considerably lower than variable rate deals, meaning your repayments could be a lot lower than someone who’s on a variable rate mortgage
- Choice. A lot of providers want to get your business, so you have a lot of offers to choose from
- Potential arrangement fees
- If the interest rate falls, your repayments won’t reduce
- If you want to pay off your mortgage early or move to another deal before the end of the fixed term there can be penalty fees to pay. Make sure you know what these are before entering into any mortgage agreement
So what’s a Variable Rate Mortgage then, and how does it differ from the fixed rate deals we’ve looked at above?
Well again, the clue’s in the name – your mortgage rate can and will move up and down in repayment terms. It does, however, get a little more complicated from there. Variable Rate Mortgages fall into one of three categories: Tracker Mortgages, Discount Rate Mortgages and Standard Variable Rate Mortgages.
Tracker Mortgages Explained
The repayment rate tracks a fixed economic indicator – the base rate, which is The Bank of England’s official borrowing rate. This doesn’t mean it’s the same as the base rate necessarily, just that it moves up and down in line with it.
Tracker Mortgages vary in length, with the most common time period being for 2 to 5 years. However some trackers are for the full term of the mortgage and are referred to as ‘lifetime trackers’.
Pros and Cons of Tracker Mortgages
- Transparency. The only thing that can affect your repayments is the interest rate it’s tied to.
- If interest rates go down, your monthly mortgage payments will reduce
- You may start on a rate lower than the ‘standard SVR’
- You’re tied to the UK economic future, which means that if interest rates increase, your monthly mortgage rates will too)
- You’re locked into a fixed term relationship and if the interest rates rise significantly during this time period you may pay a penalty fee to leave the mortgage early should you wish to change mortgages
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Discount Rate Mortgages Explained
As the name suggests, these mortgages offer a fixed % discount off the lender’s SVR mortgages for a fixed term period, usually 2 – 3 years. However, like the lifetime tracker mortgages there are now some lenders offering lifetime discount rate mortgages.
As with all things, you should shop carefully and be sure what you’re entering into. Some of the main Pros and Cons are discussed below.
- If interest rates are cut, so will your rate (by most lenders)
- You will have lower monthly repayments because of the discount
- This may not be the cheapest type of mortgage available There’s no guarantee your lender will drop your rate if the interest rate goes down
- If the interest rate rises or if your lender decides to raise their SVR for another reason, you will face repayment increases
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Standard Variable Rate(SVR) Mortgages Explained
Although each lender can move standard variable rate mortgages (SVRs) when they like, in reality this tends to roughly follow The Bank of England base rates. SVRs can vary massively between lenders, so it’s imperative that you shop around to see what deals are available.
SVRs are what most borrowers end up on after their fixed-term deal ends, and they’re often way more expensive than any of the other types of mortgage we’ve looked at. Switching fees can be really high, so check what you’re entering into before you sign up for a mortgage.
Pros and Cons of a SVR Mortgage
- Your rate will likely drop if interest rates are cut
- Usually no early repayment charge so you can pay back the mortgage in full with no penalty
- If interest rates rise, your SVR will almost certainly rise too (although some lenders do sometimes cut the rates to attract new borrowers in the face of an interest rate rise)
- At present, this may not be the cheapest type of mortgage available
- Rates can increase, even if the base rate doesn’t
- You may face switching penalty fees designed to keep you tied in to that one lender
So there we have it. Plan carefully, and make sure you seek expert advice along the way. If you want to speak to us further, https://rightmortgageuk.co.uk/mortgage/ for one to one free advice if you’re still uncertain, or in need of expert guidance.
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