Choosing A Variable Or Fixed Rate Mortgage
A mortgage is probably the largest debt you will in your lifetime and you need to make the right choices when choosing one. The biggest choice you face is between the fixed rate and variable options. To better understand the options and the choice you need to make, you have to know more about each type of mortgage.
The Fixed Rate Mortgage
As the name suggests, a fixed-rate mortgage will have one interest rate for the entire term. This interest rate is the current rate at the time the mortgage is taken. With most fixed mortgages, the term for the fixed rate will be 5 to 10 years depending on the overall length of the mortgage.
Fixed-rate mortgages are a good option because your monthly repayments will stay the same for the whole term. If the BoE interest rate rises, you will not be affected by this until the end of the fixed term. While this is ideal, if the interest rates drop, you will not benefit and have to pay a higher rate for the fixed term.
Fixed-rate mortgages are also the least flexible n the market. The fees for early exits during the fixed term will be very high. After the end of the fixed-rate term, the mortgage will switch to a variable rate.
The Variable Rate Mortgage
Variable-rate mortgages are the opposite of the fixed-rate mortgage. When looking at these mortgages, it is important to note that there are different types that you can get. The standard variable rate mortgage will have a changing rate based on what the mortgage lender decides.
In most cases, the change in rates will follow the changes in the base rate from the Bank of England. However, the lender does not have to copy all changes. When getting a variable rate mortgage, the state of the overall economy will impact how much you pay on your mortgage.
The second type of variable rate mortgage you can get is known as a tracker mortgage. The rate changes for these mortgages will move in line with the official BoE borrowing rate. The rate itself will not always be the same as the base rate, but the movements are more transparent.
The last category of variable mortgage is the discount rate mortgage. The name of this mortgage can make it appealing and the rates are usually lower than others. The drawback is the term length which is generally short at 2 to 3 years. Of course, there are some lenders who have longer terms that you can look at.
While the discount mortgage usually has the best rates, the wording used in marketing materials can be unclear. As with the standard variable mortgage, any movement of the interest rate will be at the lender’s discretion, as stated by Crawford Mulholland Mortgages Belfast.
Which Mortgage Should You Choose?
There is no right or wrong choice when it comes to the type of mortgage you choose. It will all depend on your personal situation and the risks you are willing to take. If you are worried about your financial situation and want better control over what you pay, you should consider a fixed-rate mortgage.
While these mortgages provide stability for the fixed term, they are a gamble. If the interest rates drop, you will be paying more than you would on a variable rate mortgage. However, with the BoE rates at a record low, it is unlikely that they will drop further.
If you are more open to risks, you can look at a variable rate mortgage. There is the risk of a hike in rates resulting in you paying more. However, if there are any drops after that, you could benefit.
Choosing between a fixed and variable rate mortgage is hard. It is best to determine your financial situation and what the current market is doing before you make any decisions.