There is a lot of jargon thrown around when discussing mortgages which can go straight over your head if you are buying your first home. But, you need to make yourself familiar with the terms, as no one wants to pay back more money than they need to. So, the two main terms you will come across is:
Fixed vs. Variable
A Fixed Rate Mortgage
A fixed rate mortgage does what it says on the tin, it is a mortgage with an interest rate that stays the same for a set period of time. Throughout the duration, which is usually between two to five years, your monthly mortgage repayment will stay the same. However, when the fixed rate term expires you are automatically switched to a variate rate.
A Variable Rate Mortgage
This mortgage is opposite to the fixed rate as your interest rate, and thus your monthly mortgage repayment can fluctuate at any point during the term of the mortgage.
You can break down the variable interest rate into two more terms: the standard variable rate and the tracker rate. The standard variate rate is fixed by the lender you choose and they have the power to increase or decrease it at any point. They are usually tweaked by the lender to reflect the changes in the Bank of England’s base rate, but this isn’t always the case. A tracker rate, on the other hand, follows the movement of another interest rate, most commonly the Bank of England’s base rate. Therefore, if their base rate goes down, the tracker follows suit. The tracker rate is usually higher than the rate being followed, so, for example, a tracker mortgage could be the Bank of England’s base rate plus 2%.
There are many pros and cons to both mortgage types, so we have broken them down for you to make it slightly easier to take in.
Fixed Rate Mortgage
- Your interest rate, therefore monthly repayments stay they same throughout the agreed term - It makes it easier to budget/stay on top of your finances
- A good mortgage to consider if you have a tight monthly budget
- Most interest is calculated on the outstanding sum, therefore interest is higher at the beginning of a mortgage, meaning this fixed rate for the first few years could save you lots of money
- You are committed to the fixed rate, but because a variable mortgage is a gamble, it could work out cheaper
- If interest rates go down, yours remains the same and thus you risk paying more in interest than you may with a variable rate
- They lack flexibility of other mortgages, tending to have steep exit fees during the fixed term period to deter people from changing mortgage
- Once the fixed term rate expires you are automatically changed to a variable rate which in turn means you’ll be paying more interest and your monthly repayments may increase
Of course, we have simplified the terms to make them easier to understand, however, Browning Rose Financial’s mortgage brokers will discuss your options further with you, and explain the best options available for your individual needs and requirements.
A Variable Rate Mortgage
- You may end up with a low rate and therefore low monthly repayment
- Your lender may reward you with a lower rate initially as you are taking the risk at a higher rate down the line
- Interest rates are currently low, however they could rise dramatically and your monthly repayments could spike, potentially becoming unaffordable
The choice between the two mortgages is ultimately up to you. There is no correct one to go for, they depend on both your circumstances and your attitude towards the risk involved.
The Bank of England’s base rate is at a record low, which could push you towards a riskier variable rate. However, fixed rates are still a gamble as it cannot be predicted whether interest rates may continue to fall.
To discuss, in detail, which mortgage is most suitable for you, contact us and one of our highly qualified mortgage brokers can guide you through your options.
Are you buying your first home, or looking to remortgage? Our specialist advisers are ready to help you with a range of financial advice Contact Browning Rose