What’s the difference between a fixed rate mortgage and a variable rate?


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The first thing people think about when they're looking to buy a home is deciding between a fixed and variable rate mortgage. Let's take a closer look at the difference and help you decide which one is right for your needs.

Fixed Rate Mortgages

A fixed-rate mortgage has an interest rate that stays the same throughout the life of the loan, whereas with a variable-rate mortgage, rates can change.

The advantage of going with a fixed-rate mortgage is stability in monthly payments (and it's easier to budget) and lower monthly payments if rates go up because you're paying off less principal each month; however, there may be more initial upfront costs when choosing this option.

Another downside is that if interest rates reduced then you're stuck with a fixed rate that's higher than the market rate and you wouldn't benefit from the lower rates.

Variable Rate Mortgages

A variable rate mortgage will have an interest rate that changes yearly and in some cases monthly. The advantage of this option is that if rates reduce then your monthly payments will reduce in line with the rate it is tracking.

When it comes to variable-rate mortgages there are several options to choose from such as a tracker rate mortgage, a capped rate mortgage or discounted rate mortgage.

Tracker Rate Mortgages

Tracker Rate mortgages are when a lender tracks a base rate (usually the Bank of England base rate) and adjusts the interest rates you pay up or down in line with movements of the tracked rate meaning you benefit from reductions but also pay more when rates rise.

Capped Rate Mortgages

Similar to a tracker rate mortgage, capped rate mortgages are where the interest rates follow a predetermined base rate and move in line with movements of that base rate. However, unlike trackers in which your monthly payments can go above a set amount, capped rates stay at or below an agreed-upon fixed interest rate limit.

Discount Rate Mortgages

A discounted rate mortgage is where you get a lower interest rate than the lender SVR for a specified period. This has the benefit of bringing monthly repayments down, making the initial payments more affordable. However, these will rise as the rate at which the discount rate tracks increase meaning your monthly payments could increase.

What type of mortgage should you choose?

The answer is it depends! To understand which option is the better option for you there are many more factors that need to take into account such as:

  • Your attitude towards risk.
  • How you feel your circumstances may change such as if your planning on starting a family or changing jobs - maybe even getting a promotion in the near future.
  • Your budget and if you may have the option to make overpayments on your mortgage.

There are many considerations to weigh when deciding which mortgage type is best for you and your situation, including dealing with changes in the UK property market. A good adviser will be able to show you how the repayments on both fixed and variable rate mortgages work over different time scales so you can see what works for you.

We're here to help you make the right choice

It makes sense to talk to a qualified mortgage broker. We can find the mortgage product that suits your circumstances best. For more help and guidance, contact The Mortgage Stop today! You can book an appointment or request a call back using the buttons below.

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