What is the difference between a fixed rate and variable rate mortgage?
If you’re embarking on the exciting journey of homeownership then one of the key mortgage decisions you’ll need to make is whether to go for a fixed rate or a variable rate mortgage.
Each has its own advantages and disadvantages so it is important to understand exactly what they are and how they work.
What is a Fixed Rate Mortgage?
So, how does a fixed rate mortgage work? A fixed-rate mortgage offers stability in an otherwise fluctuating market. With this mortgage type, you lock in a predetermined interest rate for a specified time.
This means that irrespective of market changes, the monthly payments remain constant, providing a sense of predictability and financial security.
The length of time you can fix for is also a consideration when assessing a fixed rate mortgage. Typically, the main options are 2 year and 5 year fixed rates. There are other options available, with some lenders even offering up to 10 year fixed rates but the 2 year and 5 year are the most commonly offered by lenders.
What are the benefits of a fixed rate mortgage?
The primary advantage of a fixed rate mortgage lies in its predictability. You can plan your monthly budget effectively, knowing that your mortgage payments will remain unchanged throughout the agreed-upon term. This stability can help shield you from the impact of rising interest rates, offering peace of mind in an ever-evolving mortgage market.
What is the potential downside of a fixed rate mortgage?
It is important to know that along with the comfort of a fixed rate, it also comes with its own set of considerations.
The initial interest rate on fixed mortgages may be higher compared to variable rates, potentially impacting the cost of your monthly payment. Additionally, being locked into a fixed rate during a period of falling interest rates means you could be missing out on potential savings.
Another important consideration is your future plans, for example moving house. If you are within a fixed rate period, then this means you may be liable for early repayment charges if you leave the fixed rate mortgage early.
What is a variable rate mortgage?
In contrast to a fixed rate, a variable rate mortgage, also known as a tracker mortgage exposes you to the fluctuations of the market interest rates. The interest rate on this type of mortgage can change periodically based on the current mortgage market.
What are the benefits of a variable rate mortgage?
Variable rate mortgages will often have lower initial interest rates, providing an opportunity for reduced initial payments. Furthermore, during periods of falling interest rates, you may benefit from lower overall interest payments compared to a fixed rate option.
Variable rates will sometimes have no early repayment charges so this means if you decide to sell or to remortgage to a different mortgage deal you may not have any early repayment penalties. This will be different for each product so it is important to make sure you are aware of all the conditions of the mortgage prior to applying.
What is the potential downside of a variable mortgage?
It is important to consider that while there are potential benefits to a variable rate mortgage there is also an increased risk and uncertainty. The potential for rising interest rates can lead to higher monthly payments, causing an increase in costs to homeowners. The variable nature of these mortgages requires you to be vigilant and prepared for market fluctuations.
Should I do a fixed rate or a variable rate mortgage?
Deciding between a fixed rate and variable rate mortgage hinges on various factors. Current market conditions, individual financial goals, and risk tolerance are all crucial considerations. Assessing personal financial situations and future plans is also essential to make an informed decision.
Seeking guidance from a mortgage professional is paramount. We can provide tailored advice based on individual circumstances, ensuring that you understand the implications of each mortgage type. Being well-informed empowers you to make decisions aligned with your financial goals.
Our team of expert mortgage brokers at Complete Mortgage Advice will be able to help you understand all the options and guide you to the mortgage product that is best suited to your individual needs and goals.
Conclusion
With many mortgage options to choose from, understanding the details of fixed and variable rate mortgages is vital. Whether opting for the stability of a fixed rate or the flexibility of a variable rate, you must carefully evaluate your financial situation and future plans. Opting for the wrong mortgage product could end up costing you thousands in the long run if you get it wrong.
If you are looking for help with a mortgage, then contact us today for expert and honest advice.
Tom Boulden
Mortgage Broker
01752 905011
info@completemortgageadvice.co.uk
Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage. There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
