When you look at mortgages, you soon realise they fall into two distinct categories: fixed and variable rates. It gets more complicated than that, but as an introduction we’re going to explain the basic distinctions between the two. Which is better? It depends on your financial circumstances, and your general attitude towards budgeting, planning and risk strategy.
Variable Rate Mortgages
Variable rate mortgages fluctuate each month with the economy; interest rates are lower if the economy dips, or higher if it fares well. What you pay each month changes according to the economic climate. Some buyers prefer to coast it this way, while others prefer the surety of fixed rate deals.
Benefit: Your payments are set by the Bank Of England (plus whatever percentage your lender charges). This feel like a ‘fairer’ system that is influenced by the swaying tides of the economy. If interest rates are low, so is your mortgage.
Cost: The same qualities that influence the benefits also affect the drawbacks. If interest rates soar, you’re stuck with mortgage repayments that match. This unpredictability is what turns many people off variable rate mortgages.
Fixed Rate Mortgages
As the name suggests, fixed rate mortgage payments remain unchanged throughout a designated period (usually 2, 3, 5 or 10 years). Whatever the economic climate, your interest rate takes a steady course and will not change until the designated period is over. As you can imagine, a lot of people prefer this type of deal as it adds a level of certainty over what future payments will cost.
Benefit: You know the exact price of your mortgage. This can be very reassuring and take the headache out of your monthly budgeting. For many homeowners, this is the deal-breaker.
Cost: Fixed means fixed, and that means missing out on lower payments if interest rates fall. You’re also likely to pay larger starting rates than on a variable mortgage, and the penalty price for cancelling is much higher.