Fixed Vs. Variable Rate – Which Mortgage is Right for Me?
Since the base rate dropped to an all-time low of 0.25%, more and more home buyers and landlords are asking whether they too could benefit from a reduced monthly mortgage repayment. Especially with talk of further cuts to come!
Have the recent changes to rates got you thinking about your own mortgage? Then read on, to discover whether or not a variable rate mortgage could be right for you…
How Can I Benefit From Reduced Rates?
Until very recently – August 2016 to be exact – the base rate hadn’t seen a reduction since March 2009, when it fell to 0.50%. So what changed? Well of course there was the EU referendum, the result of which transformed economic outlook and led to the Monetary Police Committee cutting base rates to their new record low.
So how can these cuts benefit you?
Of course, how these recent changes impact your monthly repayments will depend on your current mortgage deal, of which you will have one of the following:
Fixed Rates – Does exactly what it says, these rates will remain the same regardless of how the base rate changes.
Base Rate Tracker – These rates are variable and are directly impacted by the base rate; if it falls, then so will your monthly repayments. Likewise, if the base rate was to rise, again so would your repayments. Sometimes, a tracker rate will come with a minimum rate – or ‘floor’ rate – so check for details of this in your mortgage terms and conditions.
Standard Variable Rate (SVR) – With an SVR, even if the base rate were to move, lenders are not required to change their rates. Having said this, the majority of lenders have applied the recent 0.25% – even though there is no guarantee that they will continue to match the base rate, should it drop further.
Is a Variable Rate Riskier?
There is no clear-cut solution when it comes to choosing between a fixed or variable rate. What it comes down to is risk, and personal circumstances (i.e. how much wriggle-room do you have in your budget?). After all, nobody can say for sure how interest rates will fluctuate in the upcoming months and years.
That is why typically, variable rates tend to be lower in comparison to a fixed rate. This gives them the benefit of being offered at more budget-friendly amounts, with added benefit of rates becoming cheaper still, should the base rate fall further. However, they do then come with the risk of increasing in price, should the base rate rise.
So, what works best for you will depend on your need for stability. If the worry of a future rise in rates and an increase in repayments makes you anxious, then the predictability of a fixed rate may be better for you. Alternatively, you may be put off by the fact that a fixed rate has no potential for a decrease in payments, making variable rates your preferred option.
I’m a Buy-to-Let Landlord – What’s My Best Option?
The pros and cons of variable and fixed rates are largely the same for buy-to-let landlords or anyone with a portfolio of property. The choice you make will depend largely on how much budgeting certainty you’re looking for.
However, with the number of recent changes to have impacted landlords, for example, the stamp duty surcharge and changes to tax relief etc. many may find the stability of fixed rates more attractive. If you have a particularly large portfolio, you may even want to try out a combination of both types of rate? That way, any changes to the base rate will not impact you entirely but still give you opportunity to benefit.
What Does the Future Look Like For Mortgages?
With potential for another cut to the base rate, the number of home buyers considering a variable rate will definitely increase. Having said that, with many lenders offering increasingly competitive fixed rates, it would seem that the fixed rate will remain for now the preferred choice among landlords and homeowners.
Want to look into your mortgage options? Speak with one of our expert mortgage advisors, either online or by telephone (01702 619221).