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Should I Choose a Fixed Rate or Variable Rate Mortgage?

If you’re a first-time home-buyer, it’s easy to feel overwhelmed by all of the financial information and questions you might be faced with. Perhaps one of the most important questions you’ll have to ask yourself, though, is whether you should choose a fixed rate or variable rate mortgage?  

Like most things, there are advantages and disadvantages to each one. Your mortgage broker will look at your individual needs, wants and circumstances and will work with you to decide on which rate is best for your home -buying journey.

 But first, which is a fixed, variable and hybrid mortgage, and what are the pros and cons to each one?

What Are Fixed Rate Mortgages?  

 Fixed rate mortgages are typically a bit easier for people to understand. Simply put, you’ll get charged a specific interested rate by your mortgage lender that stays in place for an agreed-upon number of years.  Lenders call this the incentive period – and all fixed deals will have one, whether it's two, three, five, 10 or even 15 years. 

What Are the Pros and Cons? 

 One of the biggest advantages of a fixed rate mortgage is that you’ll always know what you need to pay. No matter what happens in the economy or to interest rates, yours will be locked in until that agreed period of time is over. It makes it easier to set a budget and understand what you can afford, and your Broker will take this into consideration when assessing your situation.

 However, there are some potential pitfalls to be aware. As with an incentive rate, most lenders will charge you an Early Repayment Charge should you leave before the deal end date. You need to be mindful that the Bank of England Base Rate could fall during that time, or you may wish to redeem your mortgage for another reason, say moving home. 

 What Are Variable Rate Mortgages?  

Variable rate mortgages have a bit more depth to them when it comes to what you should know. Variable rates can move up and down with any interest rate changes. That means there’s no certainty in what you’ll have to pay each month as your payments could in theory fluctuate on a regular basis.

A variable rate mortgage can be a good thing with people who have flexibility in their budget.

What Are the Pros and Cons? 

As you might expect, the biggest disadvantage of a variable rate mortgage is not knowing what your monthly payment will be. If interest rates skyrocket and your payment increases too much this could impact on your ability to afford your monthly mortgage repayment resulting in undue stress and potential financial implications. Your broker will take this into consideration when assessing what mortgage rate is best for you.

But, when interest rates are low, your payment could also be extremely low. It can feel like a bit of a gamble, but if you have the financial security and scope within your budget, you can get lucky with frequently-low interest rates and equally-low payments.  

Types of Variable Rates 

All types of variable rates go up and down as interest rates change. But, the three most common ones are:  

  • Tracker Rate: Tracks the Bank of England (BOE) base rate, usually with an additional margin on top applied by your lender, so for example, it could be 0.25% above the Bank of England base rate. 
  • Capped Rate: Offers the potential advantages of a variable while giving you the security of having a ceiling limit which can help protect you in the event of high interest rises. 
  • Discount Rate: Offers a discount off your lenders Standard Variable Rate (SVR), usually by 1-2% for a period of time, known as the incentive period 

Hybrid Mortgage Loans 

In some cases, a hybrid mortgage loan might best fit your needs. It combines the best of both worlds from fixed mortgages and variable mortgages by allowing you to pay a fixed rate for a predetermined amount of time.  

With a standard two-year fixed-rate mortgage, for example, you would lock your interest rate in for two years. After that, you would generally start paying the lender’s standard variable rate (SVR) until you either remortgage or pay off the loan.  

With a hybrid deal, you would also have a two-year fixed-rate period – but would then shift to a discounted rate (set at a percentage below the lender’s Standard variable rate) for a further period, often three years. Only after that would you move onto the SVR. 

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What Are the Pros and Cons?

This allows you to build up your finances by knowing how much money you’ll have to pay each month for a certain amount of time. By the time you reach the adjustable rate phase, you may be in a more secure financial situation, and able to handle potential rate changes. 

These loans remain rare with just 4% of the total market, which may mean that the rates offered are not the best for your situation. However, your Broker will be able to assess if Hybrid Mortgages are best for you.

Mortgages don’t have to be confusing.

 At trufe, our experienced team can help you to decide whether a fixed rate or variable rate mortgage is best for you. Contact us today to take the first step of this journey together as you seek to mortgage or remortgage your home.  

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