Fixed or Variable?  Your No-Nonsense Guide to Mortgage Rates

Mortgage Advice Services understand that choosing which type of mortgage would best suit your personal circumstances is a really big decision, and one of the most important decisions to make is what kind of interest rate option would suit you best? There are lots of different types of deal available, but they are roughly divided into 2 categories; they can either be fixed, or variable.

Fixed Rate Mortgages

With a fixed rate, your lender gives you a set interest rate which fixes your repayments for the length of the agreed fixed rate period, regardless of any interest rate changes.  This is usually for a length of time called an “incentive period”, which all fixed deals have, and can vary from two, three, five, ten and fifteen years.  Which? explain there are more fixed rate mortgages than any other type of deal.

• Advantages
  • You know what your mortgage will cost each month, helping you to budget better
  • If interest rates go up, your payments won’t
• Disadvantages
  • If interest rates fall, your payments wont decrease
  • Many Fixed Rate deals have initial set up fees, while some variable rate deals (e.g. Standard Variable Rate mortgages) do not normally attract such fees.
  • You usually pay high penalties if you wish to get out of the deal earlier than agreed

Variable Rate Mortgages

With a variable rate product, your interest rate can go up, down, or stay the same.  Which? explains changes to UK economy is a key cause of this fluctuation.  Variable rate mortgages have three main types; standard variable rates, trackers, and discounts.

Standard Variable Rate Mortgages (SVRs)

Every lender has an SVR, which they can raise or lower at any time by any amount.  You are usually moved onto this type of rate when your initial incentive (fixed-rate) period ends.

• Advantages
  • If interest rates fall, your payments will likely fall too
  • Usually there is no early repayment charge
• Disadvantages
  • Your lender can change your interest rate at any time; therefore, budgeting can be difficult as the amount you pay could alter each month
  • If interest rates rise, you can expect your SVR to rise too
  • Your lender is not obliged to decrease the interest rate on your mortgage, even if the Bank of England reduces their base rate.
  • SVR rates are usually higher than the rates on other types of mortgage

Tracker Rate Mortgages

This type of mortgage tracks an external interest rate – most often the base rate set by the Bank of England.  The interest rate on tracker mortgages is usually not the same as the base rate, but it moves in line with it.  According to Which? tracker rates usually track a little above the base rate.

• Advantages
  • Only economic change will move your rate, not the lender
  • If the base rate falls, so does your payment amount
• Disadvantages
  • Budgeting can be difficult as there is no certainty of what your mortgage cost will be each month
  • If interest rates rise, your mortgage payments will increase and you could end up paying a lot more

Discount Rate Mortgages

With this type of mortgage, the interest rate is set at a certain amount below the lender’s SVR for either a set period, or for the entirety of your mortgage term.

• Advantages
  • If interest rates fall, your payments will likely fall too
  • Historically this was often the cheapest rate type, but check carefully now, as this isn’t always the case
• Disadvantages
  • Budgeting can be difficult as the amount you pay could alter each month
  • If interest rates rise, you can expect your payments to rise too

If you are looking to remortgage your property to another deal and are unsure of the best rates option for you, drop us a line today on 01332 257087 for expert, friendly, impartial advice tailored to your individual financial circumstances.  Let us help you find the right product to suit your needs.

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