Choosing between a fixed rate mortgage or a variable interest rate mortgage is a key decision. Of course there are a number of these crucial 'key' decisions that are faced whilst selecting the right mortgage; which lender you should go with, how much deposit should you be putting down. The decision you make in choosing whether to go for a fixed-rate mortgage or a tracker-rate could cost you hundreds in extra interest charges if you happen to make the wrong choice. Exasperatingly, there's no way to know what the right decision will be - until the beauty of hindsight kicks in someway down the line.
The fixed rate mortgage
With the fixed rate mortgage your payments are set in stone at a certain level for an agreed period of time regardless of what is happening in the economy or to the Bank of England's rate. Many people like the certainty of a fixed rate, as they know how much their monthly mortgage will be in two, three or five years, depending on the length of the fix.
You know the fixed rate is right for you when
- You would find comfort in the security of knowing how much your mortgage will be every month.
- Your monthly budget is tight and you simply would not be able to afford an uplift in your mortgage payment
- You know that you are someone that doesn't like to take risks
- You wouldn't be troubled if interest rates dipped below the fixed rate that you secured on your mortgage (meaning other people might be paying less).
- You've done your research and you think that the base rate is going to increase during the course of the tie in with your mortgage lender
To view the latest fixed rate mortgages click here.
The tracker rate mortgage
The tracker interest rate mortgage is almost identical to a variable rate mortgage in that the interest rate on your mortgage (and therefore your mortgage payment) can go up or down. The difference between variable rate and a tracker rate is that the tracker moves by a specific amount above or below the base rate (normally Bank of England rate) whereas a standard variable rate mortgage can be changed at the lender's discretion.
You know the tracker rate is right for you when
- You're happy to take the gamble if the base rate starts to rise knowing that you will be paying more
- You have extra money in your monthly budget to cover an increase if it should occur
- You like to take risks
- You think the base rate is going to stay the same or go down over the course of the tie in to your mortgage lender
To view the latest tracker rate mortgages click here.
To put it plainly, if you choose a fixed-rate mortgage and interest rates remain low, you might end up paying more than you need to for your mortgage. But if you go for a variable or tracker mortgage and interest rates rise, then you could end up with a much more expensive monthly mortgage bill.
There is no right or wrong answer - you only have the ability to look back retrospectively and know whether you made a good or bad decision. Until such time as we have a working crystal ball there really is no one who can tell you when interest rates will climb.
The hybrid mortgage
Another approach is to offer a hybrid mortgage with a mixture of both variable and fixed options. A number of high street banks have gone down this route by splitting the mortgage in two which allows borrowers to fix a proportion of their mortgage, while the rest of the loan remains variable, tracking the Bank of England base rate for the life of the loan. The loan is intended to appeal to people concerned about the predicament of whether to keep tracking, or take advantage from the security of locking into low fixed mortgage rates.
What else to do?
If you're currently sitting on a low variable rate mortgage then it's a good idea to overpay your mortgage if you can. It will help you cope with rising rates further down the road if they come along, and it will have the extra advantage of paying more off the outstanding loan, which in turn will mean cutting the length of the loan as well as cutting the overall cost of the mortgage. However, do check with your lender before making any overpayments as some lenders don't let you, and it could even trigger early repayment penalties. The choice is yours - fixed rate or tracker / variable rate but do bear in mind that inertia tends to keep many people with their existing lender and paying more for it, the shrewd borrowers will always shop around and take advantage of the system.
To view the latest mortgage rates from the UK's top lenders click here.
Author: KYM Editor
knowyourmoney - company information
Comment on this article...