Are Fixed Rate Mortgages the Best Mortgages?

Many people attempting to navigate the mortgage maze are faced with the dilemma of whether to opt for a fixed rate or a variable rate mortgage product. Essentially, a fixed rate mortgage has constant monthly repayments at a pre-determined rate of interest. In contrast, a variable rate mortgage has an interest level which normally tracks the Bank of England Base Rate. The Base Rate changes periodically depending on economic macro factors, which in turn results in variable rate products which track the Base Rate attracting a changing rate of interest. Detailed below are some factors to consider when deciding which type of financial product might meet your needs.

Duration is Key

One of the main advantages of fixed rate mortgages is that for the duration of the fixed rate term, the amount of money which needs to be repaid each month is pre-determined. This makes budgeting much easier and can provide a level of financial certainty which many people find reassuring. In contrast, a variable rate mortgage can experience dips and rises in its interest rate, meaning monthly payments can vary considerably, sometimes experiencing several changes in a short twelve-month period. As the Base Rate can fall as well as rise (PDF), variable rate mortgage holders can enjoy lower rates of interest than their fixed rate mortgage counterparts, but conversely must also deal with enhanced monthly repayments when the Base Rate increases. For the sake of comparison, Clydesdale Bank currently offer 2 years fixed at 2.49% versus 2.59% tracking the Base Rate for 3 years.

Trackers Have Benefits Too

Normally a fixed rate mortgage product has duration of only a few years, which gives mortgage holders the opportunity to then switch products if they decide the outlook for the Base Rate makes a variable rate mortgage more financially advantageous. Variable rate products are often of a longer duration, typically for the life of the mortgage, but if an attractive fixed rate product is found then switching can be an option. Regardless of the product, it is important to take note of any arrangement fees or penalty fees for switching or termination, as these costs can outweigh the benefits of change.

But Don’t Be Complacent

Whilst the current low Base Rate means that at the moment many people are benefiting from attractive interest rates incurred by their variable rate mortgage, this situation will not continue forever. There are some indications that the Base Rate is set to rise over the next few years, meaning that for many people now is a good time to consider an appropriate fixed rate product.

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