A big question that a lot of homebuyers will have is what kind of mortgage is going to offer them the best overall deal. In more simple terms, it really comes down to variable or fixed rates, where both do exactly what they say.
With fixed rates, they are not going to fluctuate over a specified period of time, regardless of what may happen with the Bank Of England base rate. Various deals will allow the rate to be fixed depending on different time periods, which will usually be between two to five years. In some cases, it can be as long as ten years.
What this means is that a borrower will have foresight as to what they will pay for the length of the fixed rate. “The main benefit to a fixed rate is that budgeting can be easier as it offers freedom from the worries that your monthly payment will climb along with the interest rates when they rise. This gives you room to think about any renovation or extensions the property needs,” a Guildford architect explains from his own experience.
The major downside here is that a lot of the fixed rates can end up putting you into a deal that has early repayment charges. When you need to repay the mortgage, it could result in charges that could be thousands of pounds. Most lenders will allow you to pay over a certain amount without having any sort of penalty, which will usually be about 10% of the outstanding balance of the mortgage per annum.
A variable rate will be linked to, or offer, a rate that could be moved up and down. This will cause the mortgage payment to rise and fall accordingly.
Some of the variable rates will have a certain margin that is below the standard variable rate with a lender and will sometimes be called discounted deals. Lenders will have complete control of a standard variable rate and have the ability to alter rates when they want and as often as they want.
A tracker mortgage is another variable rate option, which is pegged to the base rate of the Bank Of England. These will move up and down in direct relation to changes in this base rate.
Overall, the benefit of a variable deal is that you will have an initial interest rate that could be a bit lower than fixed rates. The downside here is that your rates will climb, making your payments rise.
Who Should Have a Fixed Rate?
If you are looking for the security of having payments that are not going to increase, then a fixed rate is for you as long as you are okay with being locked into a deal. Any first-time buyer and home buyers that will have a bigger mortgage will usually prefer the stability of a fixed rate, especially when you look at all of the other costs that come with buying property.
Who Should Have a Variable Rate?
Because the base rate is at record lows and a fixed rate is rather competitive right now, variable rates have only been able to attract a smaller percentage of borrowers in recent years. However, variable rates can be lower than fixed rates, making them attractive to people who want to be able to save. It is also best if you are able to have some wiggle room in your regular budget that will allow you to handle an increase in your mortgage payment should the rates rise.
Lifetime tracker variable rates are usually free of repayment charges, which will add more flexibility for some buyers. It can always be difficult to second-guess things that may happen to future interest rates. The good news here is that you should be able to tailor a deal to meet your needs just as long as you have some good advice.