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Whats the difference between a fixed and a variable rate mortgage?

When you’re choosing a mortgage, one of the biggest decisions you’ll have to make is if you should opt for a variable or fixed rate mortgage, as they refer to how much you will pay over the course of your loan. Choosing a mortgage with the right type of interest rate for you can save you money in the long run, so it’s important to pick wisely.

Quite simply, the interest rate on your mortgage directly affects how much it costs you each month, so the higher the interest rate, the more you’ll have to pay back. It may sound simple in theory, but choosing the right type of mortgage can be a little more complicated…

Fixed rate mortgages

A fixed rate mortgage has an interest rate that remains the same for a set time period, typically for between two to five years, meaning that the monthly repayment will stay the same during that term. It means that even if the Bank of England base rate changes, your mortgage will be unaffected. The rate is usually worked out by the lender, mostly based on their prediction of how the interest rate will fluctuate over the set period.

Most people choose fixed rate mortgages for the security they offer, as the amount you repay each month will stay the same throughout the agreed term, making it easier for you to budget and manage your finances each month.

However, they do offer you less flexibility than variable rate mortgages, as you’ll be locked into a mortgage deal for a set amount of time, leaving you unable to switch to a cheaper mortgage deal until the time period has elapsed. You can pay early exit fees, but they can be very expensive, as they are meant to deter homeowners from switching deals.

Variable rate mortgage

Variable rate mortgages are the opposite of fixed rate – the interest rate can change at any point during the mortgage term, meaning that the monthly mortgage repayment fluctuates alongside it. There are two main types of variable interest rate: a tracker rate or the standard variable rate (SVR).

Tracker rates follow the changes of another interest rate, such as the Bank of England’s base rate, whilst the SVR is set by your lender, who can increase or decrease it at any point during the mortgage term. Typically, lenders change the SVR to reflect the Bank of England base rate changes, but they can change it at will.

Although the main advantage of a variable rate mortgage is that you could end up with a low interest rate and therefore a low monthly repayment, interest rates can suddenly increase dramatically, potentially even becoming unaffordable – it’s a bit of a gamble.

So, which is better – a fixed rate or variable rate mortgage? Ultimately, there’s no straight answer to this question, as it’s completely dependent on your circumstances and attitude to risk, as it’s impossible to predict what could happen further down the line. We’re here to talk through your options and help you make the right decision for you – just call us on 0330 088 1494.

Lisa Bird

Chief Operating Officer

“One of the biggest decisions you’ll have to make is if you should opt for a variable or fixed rate mortgage"

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