Fixed rate mortgage or variable mortgage
Whether to choose a fixed or variable interest rate is a difficult choice all borrowers have to make when picking a mortgage product. But in the current economic environment, that decision is more finely balanced than ever.
The certainty of a fixed rate mortgage
A fixed rate give you absolute certainty about the cost of your monthly mortgage repayments during the term of the deal – two to five year fixes are most common, though longer-term deals are available. So for anyone worried about their ability to cope with rising repayments, the security of a fixed-rate deal is therefore very attractive.
The risk of a variable rate mortgage
Variable rate mortgages, such as tracker mortgages, offer the prospect of cheaper repayments in the event that interest rates fall, but the flipside is that you’ll pay more in the event of a rate rise.
Right now, the cheapest variable-rate deals are around 1 percentage point cheaper than the most competitive fixed-rate offers. But with the Bank of England’s base rate at 0.5 per cent, a 300-year low, there’s almost no chance of variable rates coming down further – the question is when they’ll rise and by how much.
With the economy still struggling to recover, most experts think there’s little prospect of a rate rise before 2014, so the cheapest variable rates currently look good value over that period. But there are no guarantees – and rates could rise before then, so it’s important to be sure that you could afford your mortgage payments if rates were to rise. Our mortgage repayments calculator will give you an idea of what your repayments would be at different interest rates. Over the longer term, forecasts are harder to make, so the decision gets even more difficult.
Beware mortgage fees
Choosing between a fix and a variable rate is not the only consideration when you’re picking a mortgage. There are a number of other things you need to think about to make sure you’re getting the best mortgage deal.
This includes arrangement fees, which can run into thousands of pounds, muddy the waters when comparing deals. Furthermore, mortgage providers do not base their interest rates solely on the Bank of England rate. Fixed rates, for example, vary according to movements on gilt markets, while all rates change in relation to the banks’ ability to borrow from the funding markets. This has recently become more of an issue, with concern amongst banks about the creditworthiness of each other during the sovereign debt crisis.
Speak to an impartial mortgage adviser
To discuss whether a fixed or variable rate is right for you, speak to a Which? mortgage adviser by calling us on 0117 981 7787 – or request a call back. Our advisers look at every mortgage from every available lender, and because they’re paid a salary – not a sales commission – you can have confidence that you’ll receive truly independent advice.