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Mortgage types

Understanding mortgage types: Your complete guide to fixed vs variable rates

Buying a property comes with a string of important and sometimes daunting decisions. And one of those decisions is to choose the right type of mortgage. The big decision when choosing a mortgage is to decide if you’ll opt for the certainty of a fixed-rate mortgage, or whether you think you can save money by using a variable-rate mortgage.

Fixed-rate mortgages are not always better than variable-rate mortgages – and vice versa. The best mortgage type will depend on multiple individual considerations, including long-term financial goals and even personal preferences. In this guide, we’ll provide clarity on both options so you can make an informed decision, including information on current market trends and a discussion on the pros and cons of both options.

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Key market trends

Data reported by UK Finance stated that in 2021 around three-quarters of homeowners were on a fixed-rate mortgage with 96% of new borrowers choosing a fixed-rate deal.

Exploring mortgage types

Mortgage options come in various forms, with two primary types:

  • Fixed-rate mortgages

Fixed-rate mortgages maintain a steady interest rate for a set period, often from six months to five years or more. During this time, your monthly payments remain constant. Once this fixed period ends, the mortgage typically shifts to the lender's standard variable rate (SVR) unless agreed otherwise.

  • Variable-rate mortgages

On the other hand, a variable-rate mortgage features an interest rate that can change at the lender's discretion, which includes both rate increases and decreases. The lender usually needs to give notice before raising the rate. Variable rates are influenced by the economy, particularly the base rate set by the Bank of England (BoE), which may be adjusted to stimulate the economy or control inflation.

The BoE's base rate is pivotal, affecting what lenders pay to borrow money. When banks face higher borrowing costs, these often get passed on to mortgage customers.

A standard variable rate mortgage reacts to base rate changes, but it's not an exact match. The lender maintains control over rate adjustments. Some variable rate mortgages, known as tracker mortgages, closely follow the base rate, adding a fixed percentage to it. For example, if the base rate is 3% and the tracker mortgage adds 1%, your interest rate becomes 4% until the base rate changes.

Choosing between fixed and variable rates depends on market conditions and economic forecasts, making timely mortgage advice crucial, especially when considering a switch, known as remortgaging. You can change your mortgage type to save money, but consider potential costs, including early repayment fees, mortgage advice, arrangement fees, and closing costs.

Navigating fixed and variable rate options should be a personalised process that considers things like:

  • Rate predictability vs rate fluctuations
  • Monthly payment security
  • Financial planning and mortgage costs
  • Market interest rate analysis
  • Homeownership duration
  • Risk appetite evaluation
  • Consultation with mortgage experts
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Pros and cons of fixed-rate mortgages

Fixed-rate mortgages have their pros and cons. On the positive side, they offer stability. Your interest rate remains constant throughout the fixed period, shielding you from rate hikes. This predictability can bring peace of mind to homeowners. A fixed-rate mortgage might also secure a lower interest rate for the future, though it depends on how rates evolve after taking the deal.

However, there are downsides to fixed-rate mortgages. They often come with higher interest rates compared to variable-rate counterparts. Overpayment options might be limited, and early repayment fees can be more substantial, making it costlier to remortgage.

  • When is a fixed-rate mortgage suitable? If you prefer steady, unchanging monthly payments to help you manage your budget, or if anticipate rising interest rates, it could be the right choice.

On the other hand, standard variable rate mortgages also come with their own set of merits and demerits. One of the main advantages is typically a lower interest rate compared to fixed-rate mortgages. In times of falling interest rates, your mortgage payments may decrease. Alongside this, variable-rate mortgages generally offer more flexibility when it comes to overpayments and remortgaging, often with lower fees.

The flip side is that if the lender decides to raise the interest rate, your mortgage repayments will increase. This decision depends heavily on economic conditions and the base rate, introducing an element of uncertainty into your costs.

  • Variable-rate mortgages might be a better fit if experts anticipate falling interest rates in the near future, potentially reducing your mortgage expenses. However, this option requires a higher risk tolerance, as it hinges on the accuracy of economic forecasts, which can never be guaranteed.
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Making an informed decision

Choosing a fixed or variable-rate mortgage is a big decision which can either cost or save you thousands of pounds over the long run. The decision should only be made based on individual and personal factors, not limited to preferences, financial goals, risk tolerance and the current and projected economic outlook.

Even the most financially savvy buyers can benefit from engaging the services of qualified mortgage advisers. An experienced and accredited adviser will help clients navigate the current mortgage market with a detailed analysis of their situation, ensuring they make an informed decision either way.

Consider booking a consultation with a UK mortgage adviser today, and consider the reputable and professional mortgage advice services at James Leighton – a proven name in the mortgage service industry. 

Your home may be repossessed if you do not keep up repayments on your mortgage.

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