Fixed or Variable?

One of the age old dilemmas for any mortgage borrower, whether buying their first property or switching deal on their existing home, is whether to fix their rate or go with a variable rate.

With mortgage rates plummeting in recent months the choice of deal is perhaps as good as it’s ever been for borrowers. With Bank of England Base Rate at a record low it’s no surprise that the vast majority are opting to fix their mortgage rate.

Fixed rates are rock bottom at the moment, largely because the threat of an imminent rate rise has evaporated. Low inflation figures have contributed to forecasters considering whether rates may be stable for the rest of the year, a sharp turnaround from just 12 months ago when a rise was expected.

That has seen funding costs fall, which lenders can pass on in lower mortgage rates. Competition in the market has also benefited mortgage borrowers, as lenders fight for business. As a result, fixed rates have hit new lows across the board, from short term deals through to long term fixes.

However, variable rates have also improved with a number of low rates available on Base Rate trackers and discounted rates.

Most of the time borrowers will be attracted to variable rates because they think that there is a chance that interest rates could come down. But with Base Rate at a low what do variable rates have to offer?

Some of the variable deals can offer lower rates than corresponding fixed rates although the margin between them can be surprisingly narrow.

A definite point of difference is that far more variable deals come without early repayment charges. This gives more flexibility for borrowers that want the option to overpay without being limited to the 10% per annum that typically applies to fixed deals.

If there is a potential house move on the horizon it gives the ability to review the options at that time, in contrast to most fixed rates. Penalties often apply throughout the fix so can limit options, as there is no guarantee that the borrower can satisfy the lender’s requirements at the time to take the mortgage to a new property.

Some may feel that Base Rate will remain low for some time, given that the Bank of England has repeatedly stated it’s likely to rise gradually when it does move. However, it’s dangerous to second guess interest rates and it’s important to consider how you could cope with rising monthly payments. Online calculators can help you work out how much a rate rise could affect your monthly payment.

Those that are worried about the prospect of rising interest rates or who have little slack in their monthly budget should still opt to fix. Given the fixed rates on offer at the moment, many are likely to continue to go for the peace of mind that they provide.

Guild Mortgage Service, Provided by London & Country Mortgages

YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE