Fixed rates will not fluctuate for a specified period of time, no matter what happens to the Bank of England Base rate. Different deals will allow for the rate to be fixed for different lengths of time, typically between two and five years but in some cases for as long as ten years.
That means that the borrower knows exactly what they will be paying for the duration of the fixed rate.
The main benefit of a fixed rate is therefore the budgeting certainty that it provides and removes any worry about the monthly payment climbing if interest rates start to rise. The downside can be that most fixed rates will tie you into the deal with early repayment charges.
If you needed to repay the mortgage that could result in charges amounting to thousands of pounds. However, most lenders allow you to overpay a certain amount without incurring a penalty, typically 10% of the outstanding mortgage balance per annum.
Variable Rates on the other hand will offer, or be linked to, a rate that can move up and down so the mortgage payment can rise and fall. Some variable rates will offer a certain margin below the lender's standard variable rate and are often referred to as discounted deals.
The lender has complete control over the standard variable rate and can alter the rate when it likes and in theory by as much as it likes. The other variable rate option is generally referred to as tracker mortgages, which are directly pegged to the Bank of England Base Rate. They will therefore move up and down directly in line with any changes to the Base Rate.
The benefit of a variable deal is that the initial interest rate may be lower than a fixed rate, the downside being that if rates climb your payments will also rise.
Who should take a fixed rate?
Anyone that prefers the security of knowing their payments won't increase if rates start to climb should be looking at a fixed rate, as long as they are happy to be locked into the deal. First time buyers and homebuyers taking on a bigger mortgage will often prefer the certainty that a fixed rate provides, especially given all the other costs of buying a property.
Who should consider a variable deal?
Base Rate is already at a record low and fixed rates are so competitive that variable rates have attracted fewer borrowers than fixed in recent years.
Nonetheless, variable rates can be a little lower than fixed rates and so those that think interest rates will remain low might like the idea of a tracker or discount. They should also have some room in their monthly budget to handle an increase in their monthly payments if rates do climb.
Variable rates such as lifetime trackers are more likely to be free of any early repayment charges and that added flexibility may work well for some. It's always difficult to second guess what will happen to interest rates but the good news for mortgage borrowers is that, with good advice, they should be able to tailor their deal to meet their requirements.
We've teamed up with L & C Mortgages to offer you fee free mortgage advice, head to their website or telephone (0800 923 2045) one of their expert mortgage advisers today to look into your mortgage options. NB: YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE