Choosing mortgages can be difficult. It is worth noting though, that you can change your mortgage, so even if you are not happy with the mortgage you initially choose, you will be able to change it. This means that it is a good idea to consider whether you should change mortgages on a frequent basis. Do be aware that there may be some costs associated with doing this and find out what they are, but you will also find that there could be money to save and so it will be worth paying the fees so that you can save significantly more money than that fee. Choosing between mortgages can be really tricky though. There are lots of different things to consider and fixed and variable rates is just one of the things that you will need to decide between. It is therefore worth getting an understanding of what they are and what the pros and cons of each are.
What are Fixed Rates?
A fixed rate mortgage will offer you a fixed rate of interest for a certain period of time. This is likely to be a minimum of a year but sometimes can be up to five years. After the fixed rate period ends you will move onto the mortgage companies’ variable rate and that could be pretty high. It could be possible that you have a contract to stay on that rate for a certain period of time before you can move, either onto another fixed rate that they are offering or to a different mortgage provider. This will not be the case with all companies though, you will need to check this in the terms and conditions. The amount of the fixed rate will vary and lenders will try to predict what interest rates might be and set it at a level that they feel they can profit from.
What are Variable Rates?
Variable rates can change at any time. The lender will tend to change it when they see fit and so it can be unpredictable. When the Bank of England raises the base rates, they will tend to react quickly and raise their interest rates by the same amount or more. However, if rates fall, they will tend to be slower to react and this will enable them to make extra money from you while you are paying a higher rate than they are being charged. Some variable rates will track the base rate though and this means that as soon as they change, you will swap to paying the new rate and so this might be a type of account that you want to consider.
Advantages and Disadvantages of Fixed Rates
There are quite a few reasons why people like fixed rate mortgages. You will know exactly how much you are paying each month and therefore it can make it easier to budget. If the interest rates go up, you will be protected from those increases until you finish the fixed rate period and therefore it could save you money, but the fixed rate will tend to be first offered at an interest rate higher than the variable rate, so there is a risk that you will be paying above the odds. If interest rates fall while you are on a fixed rate, you could end up paying significantly more than if you had stayed on a variable rate. You may have a big fee if you try to move from the fixed to a variable rate within the term you signed up for and so it may be even more expensive to move than to stay where you are. It is therefore very wise to take a careful look at the terms and conditions to make sure that you are aware of the fees and then you will be able to decide if you think that it is worth the risk. You may also want to think about how you feel interest rates might change and whether they are likely to go up or to go down, but this can be quite tricky to predict as there are lots of things that could impact the country and the world that will change spending patterns, inflation and therefore interest rates.
Advantages and Disadvantages of Variable Rates
Variable rates will change when the lender sees fit and you may find that they will go down as well as up, depending both on the base rate changes as well as how competitive the lender wants to be. You will not be tied in and so you will be able to keep a close check on the rates from all lenders and this could mean that you will be able to move to a better rate if one becomes available. This flexibility could be something that you will find useful. However, you could also find that rates will go up if the base rate changes and if that rate increase is steep and fast, it could make it difficult for you to afford your repayments. However, if this does happen you could move to a different lender with lower rates.
The choice you make will be very personal. If you are just about managing your bills, then going onto a fixed rate could give peace of mind knowing that you will not have to pay any more out, even if the interest rates rise hugely. However, if you have a bit of leeway with your money, you may prefer a variable rate so that you can take advantage of rate reductions and have the flexibility to change lenders if you want to.
