Fixed Rate Mortgages vs. Variable Rate Mortgages
Interest Rates (Photo credit: 401(K) 2013)
A mortgage is a huge expense for most people, so if you find yourself locked into an exorbitantly expensive rate, it may end up being catastrophic to your budget. But although you may think you are stuck with whatever deal you signed up for many moons ago, it could be cheaper to switch to a new mortgage deal even if you have a redemption penalty hanging over your head.
How Do Mortgages Work?
A mortgage is basically a home loan. We borrow money from a lender to buy a home and pay back the balance plus interest over a pre-agreed term. Different lenders charge different amounts of interest and in some cases the interest charged will rise and fall in line with the base rate, which in the UK is set by the Bank of England.
Mortgage Choices
A quick look on the internet will soon tell you that there are lots of different types of mortgage available right now, including:
- Trackers
- Discounted
- Fixed rate
Rates vary between different lenders. Some lenders try and entice new customers with the promise of a low fee or a discounted rate for the first year. Others offer a free conveyance service or extra discounts if you already have a bank account with them. This can make it very difficult to decide which deal is the right one for you, never mind whether (or not) you should remortgage in the first place.
Advantages Of A Fixed Rate Deal
The only type of mortgage that offers you the peace of mind of knowing that your payments will never change is a fixed rate mortgage. If you opt for a fixed rate deal, your payments will never go up or down, irrespective of what calamitous events occur in the world financial markets.
Disadvantages Of A Fixed Rate Deal
Fixed rate mortgages tend to be fixed at a higher rate than the current base rate because the lenders would prefer not to be caught out if interest rates rise. However, if interest rates fall significantly, you could easily end up paying well over the odds every month when others around you are enjoying low rate deals.
Advantages Of A Variable Rate Deal
The repayments on a variable rate mortgage deal will go up and down depending on what interest rates are doing, so if interest rates fall, you stand to benefit. Discounted rate mortgages also fall under the umbrella of a variable rate because even though the rate is discounted, it is still subject to the whims of the base rate.
Disadvantages Of A Variable Rate Deal
If interest rates rise, so do your mortgage repayments, which is not good when you are already struggling to make your payments every month.
When Is A Fixed Rate Deal A Good Idea?
If you are living on a tight budget, it is always better to opt for a fixed rate mortgage deal. The peace of mind of knowing what your repayments are going to be every month is worth it, even if you end up paying slightly over the odds. But before you make a final decision, do the math.
Bio
Joanne has been considering re-mortgaging her home for a few months now, which is why she has looked at the pros and cons of taking out a fixed rate mortgage deal. And thanks to the money she received as a result of her mis-sold mortgage compensation claim, she can now reduce the term of her loan.
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Category: Mortgage
