Simply put, the choice mainly comes down to variable or fixed rate, with both of them doing exactly as their names suggest. Experienced conveyancing solicitors, from Bates Solicitors, advises buyers to be fully aware of the advantages of and disadvantages of all types of mortgages before finalising their mortgage applications.
Fixed Rate Mortgages
A fixed rate does not fluctuate over a specific time period, no matter what the Bank of England base rate does. There are various deals which allow for a rate to be fixed at different lengths of time. They tend to be between two to five years. However, there are cases where they can be up to ten years in length.
What that means is the borrower knows precisely what they are going to pay for over the fixed rate’s time duration. Therefore, the major benefit that a fixed rate offers is the certainty it provides for budgeting and it eliminates any worries regarding your monthly payment increasing if interest rates start to go up.
The downside is that a majority of fixed rates do tie you to a deal and there are early repayment charges. So if you end up needing to repay your mortgage it could result in you having to pay thousands of pounds in charges. However, a majority of lenders will let you overpay a certain amount without there being a penalty. It is usually 10% of your outstanding mortgage balance per year.
Variable Rate Mortgages
On the other hand, variables rates are linked to a rate that may increase or decrease, or your mortgage payment could go up or down.
There are some variable rates that offer a specific margin that is under the lender’s standard variable rate. These are frequently called discounted deals. The standard variable rate is completely controlled by the lender. They can change the rate whenever and however often they want to.
Tracker mortgages is the other type of variable rate option that is available. They are pegged directly to the Bank of England Base Rate. Therefore, they rise and fall directly in line with whatever changes there are to the Base Rate.
The main advantage to a variable deal is the loan’s initial rate might be lower compared to a fixed rate. The disadvantage is that your payments will increase if the rates go up.
Who Should Opt for a Fixed Rate?
Anyone who prefers having the security of knowing that their payments will not go up if rates begin to increase should look at a fixed rate. They just need to be aware that they are getting locked into their deal.
Home buyers with larger mortgages and first-time buyers frequently prefer to have the certainty that comes with a fixed rate, especially, when all the other expenses of purchasing a property are taken into account.
Who Should Opt for a Variable Deal?
Currently, the Base Rate is at a record low already and fixed rates have become so competitive that in recent years fewer borrowers have been attracted to variable rates compared to fixed rates.
However, variable rates may be slightly lower compared to fixed rates and for people who believe interest rates are going to stay low may like having a discount or tracker. They also will want to have some room within their monthly budget in order to handle any increase to their monthly payments in the event that rates do rise.
Variable rates like lifetime trackers tend to not have early repayment charges. For some, their added flexibility can work very well.
It is always hard trying to second guess what is going to happen with interest rates. However, for mortgage borrowers the good news is if they get good advice, they should be able to have their deal tailored in order to meet their specific requirements.