What is the Difference Between Fixed and Variable Mortgages?

Mortgages can be very confusing and many people use a financial advisor to help them when they are picking one, especially for the first time. The advisor can also explain to them all about mortgages and the differences between them and this will help them to know what is the best option for them, However, you may not be able to afford a financial advisor or perhaps would rather do the research yourself. If this is the case then it is a good idea to get a basic understanding to build on. One good place to start is to understand the differences between fixed and variable rate mortgages.

Fixed rate mortgages

A fixed rate mortgage will usually have an interest rate fixed for a certain period of time. This could be a year, a few years or possibly five years. It is unlikely to be longer than that. The interest rate tends to be higher than the variable rate as the lender wants to cover the risk that the interest rates might increase.  However, they will be the same for the time stated, which means that you will be able to know exactly how much you will pay every month. If the rate falls, then you will not be able to take advantage of it as you will be tied into the fixed rate, however, if it rises you will be protected from that rise and not have to pay extra. If your mortgage costs are high and you are already concerned about affording them, it can be wise to protect yourself from rises in interest rates by fixing the amount that you are paying and this will enable you to not have to worry about taking any risks in that the amount you are paying will not go up. Some fixed rate mortgages will tie you in though. This means that you will not be able to swap to a different lender, or if you do there will be a big fee and even if you change to a difference type of mortgage offered by the same lender they may still charge you a fee. Sometimes the fee is extremely high and it could be wise to look into these before you take out the mortgage as they will vary between lenders.

Variable rate mortgages

A variable rate mortgage will change. This means that you will find that mortgage interest rate will change. It is likely that it will go up when the base rate goes up. The base rate is the rate that the Bank of England sets which is they rate that they lend at. They lend to banks and building societies so they will put your rates up as result. Most variable rates will go up at this time, but the lender can actually put the variable rates up at any time, so they may choose to do it even if there is not a base rate rise. If the rates go down, the rates you pay may not necessarily go down as a result. If your lender wants to be competitive and other lenders are putting their rates down then yours may be more likely to go down but there is no guarantee unless you have a tracker mortgage. A tracker will track the base rate and so the rates will change immediately that the base rate changes. This means that if the rates go down then you will start paying less. However, if the rates go up, you will start paying more. That is a risk, but it is unlikely a lender will not put their rates up when the base rate goes up. It is worth noting though, that a tracker mortgage will not just be the base rate that you pay, but you will usually pay a percentage on interest plus the base rate. You will need to look and decide whether you think this offers good value or not.

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