The main types of mortgages that we tend to choose between are fixed and variable rate ones. These differ in a significant way and it is good to understand what the differences are so that we are able to make sure that when we are choosing a mortgage, that we make the right choice for us.
Features of a Fixed Rate Mortgage
A fixed rate mortgage will have an interest rate that remains the same for a certain period of time. This amount of time will vary depending on the lender but it is normally several years, perhaps up to five or maybe even ten years. During this period of time the borrower will always make the same repayments and the amount will not vary. It is likely though, that they will be tied in to this rate, meaning that they will not be able to switch to a different mortgage with the same lender or to a different lender or if they can, they will have to pay a penalty to be able to do so.
Features of a Variable Rate Mortgage
A variable rate mortgage has an interest rate that can change. The lender can generally change it as they please, although they will tend to only change it on occasion. Often, they will change it in line with the Bank of England changes to the base rate of interest, but they may choose to not follow that lead and change it at other times. This means that you do not know exactly how much you will be paying month to month and that could lead to you not having that stability of knowing exactly how much you will need to pay.
Who Should Pick Which?
If you have a very tight budget and know that if your interest payments go up you would not be able to afford them, then a fixed rate could be a good idea. You will be protected against rate increases and this means that you would be much more likely to be able to afford your repayments. However, you will be tied in and so if rates fall, then you will not be able to take advantage of this and therefore if rates are high and likely to fall, you might want to think hard about this. Consider whether there are things that you might be able to do if you had to pay more and if you feel you could cope, then it could be worth going with the variable. It is worth remembering that you can swap from a variable rate mortgage and so if you find it too expensive you might be able to get a cheaper one or switch to a fixed. Switching does cost money though, so bear that in mind too.
If you can afford to pay a bit more, then it will be less of risk to take out a variable rate. If you do end up having to pay more, you will have the money available to do so but if the rate goes down then you will benefit from that. Do calculate how much it might go up though and then you can work out whether you think that you will be able to afford those increases. It is hard to guess but if you try different levels of interest and work out what you would be paying each month, you will be able to have an idea of what you might expect to have to pay. Check your household accounts carefully to make sure that you will be able to afford larger repayments and also think about whether there might be changes that you could make that could help you to be able to afford them even if you have other expenses that increase at the same time. Remember, if you have any loans or ca credit card or overdraft those will go up as well.