If you are looking for a brand-new mortgage or if you are thinking of changing to a different mortgage provider then you will have lots of things to think about. There are so many to choose from and it can all be totally overwhelming. There are initial questions though that you can ask and it is good to do this as you will be able to cut down your choice. The first question should perhaps be whether you want a fixed or variable rate. You may wonder which is best and which will work for you.
What is a fixed rate mortgage?
A fixed rate mortgage is one which has an interest rate which is fixed for a certain time period. This is not normally the full term of the mortgage but could be for the first five years or so. The amount of time it is fixed for will depend on the lender. The interest rate is often a bit higher than the Bank of England base rate and might be higher than variable rate mortgage rates as well.
What is a variable rate mortgage?
A variable rate mortgage is one where the rate can change. This means that the lender can change the rate when they wish to. If you have a tracker mortgage, then the rate will follow the base rate. The lender will charge a fixed rate and add that on to the Bank of England base rate. This means that if the Bank of England change their rate, your mortgage rate will also change. If you do not have a tracker, then it will be up to the lender whether they change their rate. They will normally put their rate up if the Bank of England raises the base rate, but if the base rate goes down, they may be slower to reduce their rate. They may also put their rate up from time to time even if the Bank of England does not reduce theirs.
What are the advantages and disadvantages of the two types?
Some people really like the security of a fixed rate. They will know exactly how much they will be paying each month during the fixed rate period. This means that they will be able to calculate what they will be able to afford, pick a mortgage based on this and know that unless their circumstances change, they will be confident that they will be able to make those payments. However, it is possible that you get tied in with a fixed rate lender. They may give you that rate on condition that you do not swap lenders or you may have to stay with them even once the fixed rate deal ends and move onto their variable rate. This means that if there are more competitive rates out there, you will not be able to take advantage of them. Many people suffered when interest rates dropped quickly and to historic lows and they were in fixed rate deals that were significantly higher and they could not get out of them.
A variable rate is not normally one that you get tied in to. This means that you will be able to change easily to another mortgage provider should you feel that the rates are not competitive. However, there can be costs associated with switching and so it is not something that you will want to do that often. Variable rates can be lower than fixed rates, but there is a unpredictability that rates may just suddenly go up without warning and you will need to be prepared for this. It is wise to make sure that you are confident that you will be able to cope financially if you have to start paying more. Do some calculations to work out how much extra you might have to pay if rates go up and see if you think that you will be able to afford it.
Which is best for me?
This can very much depend on your financial situation. If you are easily able to make repayments and would be able to afford higher ones, then you could consider a variable rate. However, if money is really tight then it may not be worth the risk as if rates go up, you may struggle. You might also be wise to think about whether you think rates are likely to go up or not. This will depend on the economy and can be very hard to predict in the long term, but you may be able to make some short-term predictions or look at financial pages to see what economists are saying about it.
If you are really stuck then it could be wise to talk to an independent financial advisor about it. Although they will charge you money, it can be worth it if you can save a significant amount of money in the future or if it allows you to get a mortgage that you are confident that you will be able to repay.