Fixed Rates or Variable Rates? Which is the option for You
Homebuyers will inadvertently be faced with question of which mortgage broker type would be the best for their situation. The choice will come down to which of two type of rates they are most comfortable with Fixed rates or Variable rates. Believe it or not, they are as easy as they sound.
Like their name implies, fixed rates will remain fixed over a specified period of time. They will not fluctuate regardless of what happens to the base rate set by the Bank of England. Different arrangements allow the rate to remain unfixed for different periods of time. While some mortgage deals allow for as much as ten years of fixed rates, typically only two or five year periods are issued.
This means that the person taking out the mortgage will know in advance exactly how much they will be paying for the remainder of this fixed rate period. The upside to this deal is that there will be no surprises if the interest rates start to climb and this provides an easier to budget expense.
On the downside we see this type of deal usually ties the borrower into the fixed rates with early repayment charges. If you were going to repay the mortgage you may run up a very high expense in repayment charges, this could easily surpass thousands of pounds.
On the other hand, many lenders allow their borrowers to overpay a specified amount without being charged penalties, this is usually within 10% of the outstanding mortgage balance per year.
As you might imagine, variable rates are offered, or connected to, rates that will fluctuate and the payments will be greater or smaller accordingly.
Some of these variable rates will offer discounted deals, or a special rate below the what the lender would typically consider standard. The lender is give full control over the variable rate and can raise it and drop it as often and as much as they see fit.
Another type of variable rate is often called “tracker” mortgages, these are linked directly to the rates being set by the Bank of England. As the base rate climbs or drops, the rates of tracker mortgages will follow suit.
Smaller payments than those found in fixed rate deals will be the upside of the variable rates; but by the same measure, these rates can rise and take your payments with them.
Who should look for a fixed rate?
People who prefer the security of knowing their rates and payments will not be getting any bigger (or smaller) should consider the advantages of the fixed rate option. They must consider they will be locked into the deal with no advantageous chance of early release.
First time mortgage borrowers and homeowners are the most common type of fixed rate borrower. Security of a steady price is important when you consider all the other costs of property ownership.
Who should look for a variable deal?
Base Rate has hit an all time low and more borrowers than ever before are attracted to the competitive rates being offered in recent years.
Variable rates can also be found that are a bit lower than fixed rates, anyone betting they will stay low would be rewarded by considering the discount or tracker deals. They might want to consider allowing some wiggle room in their monthly budgeting just in case those rates do rise.
Another nice thing about those variable rates is that they are not usually bound by any penalties for early repayment. This will work out well for greater financial flexibility in the future.