Variable Rate vs. Fixed Rate Mortgages

Sep 30, 2014   //   by Keith McDonald   //   Lending Guide  //  Comments Off on Variable Rate vs. Fixed Rate Mortgages

When you’re looking for a mortgage, one of the most important decisions you’ll have to make is whether to opt for a fixed-rate mortgage or a tracker mortgage. Let’s compare them both here.

The main difference between the two is that variable rate and tracker mortgages can both fluctuate, while the rates on a fixed-rate mortgage are set in stone for the duration of your deal.

The main similarity between the two is that both normally offer a headline rate for a period of between 2 and 5 years, after which they revert to the lender’s standard variable rate.

At this point, you can remain with the same lender, or look to re-mortgage at a lower loan-to-value to secure a better rate.


Tracker Mortgages

A tracker mortgage follows any changes to the Bank of England base rate. If the base rate goes up, the lender will pass this on to the customer by raising the mortgage rate by the same amount. If it goes down, the lender will be expected to lower the rate.

A variable rate mortgage can occasionally change owing to other factors. A lender might raise its variable rates if it experiences a rise in costs, or lower it if it seeks to become more competitive.

The main advantage of a tracker mortgage is that homeowners can expect to benefit from any reductions to the Bank of England base rate.

Customers can also benefit from attractive variable rate deals, which lenders can offer in the knowledge that they can raise these rates if circumstances change.

  • If the base rate goes down, customers generally benefit from lower costs.
  • Lenders can be generous with their deals, because they are able to raise rates.
  • If the base rate goes up, customers should expect the mortgage rate to rise by the same.
  • Lenders may increase the mortgage rate if it experiences higher costs.

Fixed-Rate Mortgages

A fixed-rate mortgage protects against any changes in the base rate. This could be to your benefit if the base rate rises. Equally, if the base rate falls, you’re stuck with what you’ve got.

Normally, lenders will allow you to achieve a longer fix, of up to 5 years and beyond, for a slightly higher rate. This insures you against interest rate fluctuations for longer.

So, in a sense, a fixed-rate mortgage can be seen as a slightly different type of educated gamble.

But having a fixed monthly payment for a set period can make it easier to budget and offers a certain amount of security for a homeowner.

  • If the base rate goes up, customers are protected against higher costs.
  • Homeowners can budget, given the security of a fixed payment.
  • If the base rate goes down, customers are stuck with a fixed rate.
  • Rates might be slightly higher for the guarantee of a fixed rate.

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