Variable vs Fixed Rate Mortgages
The vast majority of people can’t afford to buy a home with cash so we usually need to take a mortgage out with a bank or building society. While this may sounds simple enough mortgages comes in all shapes, sizes and types and they all have different benefits and drawbacks. The challenge is choosing the mortgage that is right for you.
Variable Rate Mortgages
A standard mortgage uses a variable interest rate, which means your monthly payments go up or down according depending on the movements of the Bank of England base rate. The benefits are that your monthly payments fall when interest rates go down and that the initial “discounted” rate will be lower than with a fixed rate deal, so you will enjoy lower monthly payments for an agreed period. The drawback’s are that you will have no stability as interest rates move over time and if there is a large increase in the Bank Of England’s Base Rate you may find yourself unable to meet your monthly obligations. At the moment the BOE Base Rate remains at a record low so Variable Rate Mortgages have never been more popular – however, the rates will start to rise again at some point, probably at the beginning of 2017 so be aware.
Fixed Rate Mortgages
A Fixed Rate Mortgage protects you from uncertainty and fluctuation in your payments. However, you’ll usually pay a higher rate to begin with and while you’ll be thankful you chose this type of product when interest rates are rising you will be very fustrated if interest rates start to fall. Fixed Rate Mortgages are usually only available for a fixed number of years (lenders don’t like to lock themselves into long term deals) so be prepared to shop around or renegotiate your mortgage every few years. You should also study the fine print carefully and be aware of any early repayment charges should you decide to pay off the mortgage early.
There are a number of less common types of mortgage available in the market. Mortgages aimed at first time buyers can offer lower initial interest rate that begin to rise after a few years. These have many of the same benefits and drawbacks as fixed rate mortgage deals.
If you think you will be able to build up your savings during the mortgage term, then you may want to consider an offset mortgage. This allows you to have some control over your mortgage payments as the interest on your savings is foregone and used to reduce the amount you pay on your mortgage. The disadvantage of this type of deal is your savings may not be readily available to you for a rainy day and if you dip into these savings your mortgage payments will increase again.
The mortgage market can seem a scary place but there are really only a few different types of mortgages available to you. Take the time to understand the differences, study the fine print, shop around different providers and you should be able to find a mortgage that is perfect for you.