Difference between fixed-rate and variable-rate mortgages
BuyingConveyancingMortgages
Once you have decided whether to borrow on a repayment or interest-only basis, you will need to decide how your interest will be calculated. There are several different mortgage types available. Today we are going to concentrate on the two main ones, fixed-rate and variable-rate.
Fixed rate mortgages
A fixed-rate mortgage essentially fixes the interest rate for a set period of time. This means, the amount of money you will be paying each month will not change. Fixed-rate mortgages typically last for 2, 3, 5 or even 10 years. At the end of the period you signed up for, you will need to renew your mortgage. Typically, the longer you fix for, the higher the interest rate will be.
The main benefit of a fixed-rate mortgage is that it provides you with certainty. Once you have accepted the mortgage offer, and the monthly cost has been agreed, you will be paying this amount back each month, and this will not change until the time period is up.
The main disadvantage of a fixed-rate mortgage is that although this mortgage provides you with certainty and fixes your monthly cost, should the interest rates fall, you will not benefit from this saving. You may therefore end up paying above market rate for a longer period of time.
Once you’ve reached the end of the fixed-rate period, the mortgage provider will switch you to their standard variable rate. This will likely be higher rate. When this occurs, many people choose to re-mortgage in order to obtain a better deal.
Variable rate mortgages
A variable-rate mortgage essentially tracks the base interest rate set by the Bank of England. Should the Bank of England increase the interest rate, your monthly cost will also increase. Likewise, if the rate is lowered, so will your monthly cost. The benefit of this type of mortgage is that you can benefit immediately if the interest rate falls. However, be aware, if the rate increases, so will your monthly costs.
There are four main types of variable rate mortgages – tracker rate mortgages, discount rate mortgages, cap rate mortgages and the standard variable rate set by the lender. These types of variable-rate mortgage should be carefully researched and if they are of interest, we strongly recommend you speak with a mortgage adviser.
