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Fixed vs Variable mortgages - which should I go for?


The difference between Fixed Rate Mortgages and Variable Rate Mortgages is that a Fixed Rate Mortgage will have a rate that will not change for the period that it is initially fixed for and a variable rate mortgage has the potential to increase OR decrease over the initial term.

Fixed-Rate and Variable Mortgage Examples

2 Year Fixed Rate Mortgage at 1.5% – the interest rate applied to the mortgage will remain at 1.5% irrespective of what happens to interest rates in the market for the fixed period (in this instance for 2 years) i.e. if the Bank of England Base Rate were to increase by 1% or decrease by 1% during the fixed period then this would have absolutely no impact in the rate that you are paying on your mortgage.

2 Year Tracker Mortgage 1.5% (Base Rate plus 1.4%) – In this example, the interest rate is governed by what happens with the Bank of England Base Rate (currently at 0.1%) with the lender adding an additional rate of 1.4% to make the starting rate 1.5%. If the Bank of England Rate changes (up or down) during the initial 2-year introductory period then rate attached to your mortgage will rise or fall. As an example, if the Bank of England base rate increased by 1% (to 1.1%) then your new rate would be 2.5%, but if it fell by 0.05% (to 0.05%) then your rate would reduce to 1.45%.

The interesting thing to note with the variable rate is that only the interest element of your mortgage payments would change, not the capital repayment element.

Interest Variable Rate Mortgages

£100,000 Mortgage at 1.5%, over 25 years would cost £400/month. Of this £400, £125 is the interest element and £275 is paid off the initial £100,000 borrowing per month.

So, if the interest rate were to rise by 1% to 2.5% (for example) the interest element to the payment would rise to £208.33/month with the capital element remaining the same at £275/month. So a 1% increase would only increase your payments by £83.33/month to £483.33/month.

The key to consider when looking at the choice between a fixed rate and a variable rate is your view on what will happen to interest rates during the period that you will hold your mortgage, your income position, how you budget month to month, what other financial or family planning you have ahead of you.

If you are on a fixed salary and have fixed costs then a fixed rate will allow you to a budget month to month.

If you believe that the Bank of England Base rate will remain the same or fall then you may be inclined to consider a tracker mortgage, especially if you are also in a position financially to be able to weather any increases to the Base Rate where your mortgage costs may increase.

The other difference to Fixed Rate Mortgages and Variable Rate mortgages is that Fixed-Rate mortgages are often slightly more expensive, i.e. they start at a higher rate, than Variable Rate mortgages. This is because they give a greater degree of certainty to the borrower, but also the lender has to manage the cost of this over the period that they are fixed for, i.e. the funds that they have on deposit will come at a cost and if rates in the market change this could affect the margin that they make on the money they lend out. With tracker rates, they tend to be cheaper to start, but as mentioned then have the potential to rise or fall based on what happens with the Bank of England Base Rate for example.

In essence, there is no right or wrong mortgage, as this is entirely dependent on the position of the borrower, their understanding of rates, their understanding of the economic outlook, their attitude to risk and what else they have coming up in life e.g. starting a family, retirement etc…

Through discussing things fully with a qualified mortgage broker they will be able to identify the right mortgage for your circumstances and advise you accordingly.

I have been in the Financial Services industry for the past 14 years. Throughout this time I have worked across much of the South of England and held a wide variety of positions that have given me a wealth of knowledge and experience in all aspects of Financial Services.

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