Should I choose a fixed or flexible rate mortgage?
You move ? Or is your mortgage contract coming to an end? If so, you’ve probably wondered whether you should choose a fixed or flexible rate mortgage. With interest rates at all-time low, is it better to lock in your rate for long-term certainty? Or will you get a better deal with a flexible mortgage?
Your mortgage is likely to be your biggest outlay, so it’s important to do your research and choose the best product for you. Here I look at the differences between the two types of mortgages.
Differences between fixed and flexible rate mortgages
Any type of mortgage is a financial contract between you and the mortgage lender. With a fixed rate mortgage, you agree to pay a fixed amount of interest on your loan until the end of the term of the agreement – typically two to five years. Even if the Bank of England base rate changes, your mortgage payments will remain the same.
Discount mortgages and follow-on mortgages are flexible types of mortgages. With these, your interest rate will vary depending on the Bank of England Base Rate. If the base rate increases by 0.5%, your interest payments will generally also increase by 0.5%. Tracker mortgages follow the Bank of England base rate with a margin added by the lender. Low cost mortgages follow the lender’s standard variable rate (SVR) and are generally slightly more expensive than follow-on mortgages.
It should be noted that the term of your mortgage is generally different from the term of your contract. For example, if you accept a 25-year mortgage with a two-year reduced rate, that means your mortgage will be paid off over 25 years, but the reduced rate will only apply for two years.
After two years, the mortgage will revert to the lender’s SVR, which is usually much higher than a reduced rate. Many people choose to remortgage every time their contract ends to get another discount and lower costs.
Benefits of a fixed rate mortgage
Here are the main advantages of a fixed rate mortgage:
- Financial security: you’ll know exactly what mortgage payments to expect until the end of your contract. This is great if money is tight and you would be hard pressed if your mortgage payments went up.
- Save money if interest rates rise: you will be protected against interest rate hikes because your mortgage payments will stay the same. Although no one knows the future, an interest rate hike is possible at some point as interest rates are at an all-time low of 0.1%.
- Good deals around: Right now there are some fantastic deals on fixed rate mortgages, especially if you are lucky enough to have a large deposit.
Benefits of a flexible mortgage
Here are the main advantages of a flexible mortgage:
- May cost less than a fixed rate mortgage: banks often charge slightly higher interest rates on fixed rate mortgages because they are taking a risk and will get less money back if rates go up.
- Save money if interest rates drop: your mortgage payments will go down because your rate is flexible. However, at the moment, a cut in interest rates is unlikely because rates are already so low.
- Longer term offers available: if you want a long term mortgage for 10 years or more, it may be easier to get a flexible rate. Longer agreements can be great if you have a smaller mortgage or don’t want to worry about remortgage every few years.
Other things to consider
There are a lot of things to consider when considering a new mortgage. Think about the cost of the product as well as the length of the mortgage you want to get.
Mortgage lenders often change the offers they offer on mortgages, even if the Bank of England rate is unchanged. They take into account their predictions about future interest rates as well as how cheap it is for them to borrow money. If you have some time before you have to remortgage or buy a home, then it’s worth keeping an eye out for bargains.
If you’re a first-time buyer and you’ve found an offer you like, it might be time to take the next step and apply.
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