When you are considering a mortgage then you may find it quite confusing to decide what to take out. There are lots of lenders and you may wonder how to start to pick between them. One useful way to start with this is to think about whether you want a fixed or variable rate mortgage. However, you will need to understand what they are and what the advantage of them are.
Fixed Rate Mortgages
With a fixed rate mortgage you will always pay the same interest rate during the fixed rate period. This means that even if the base rate changes, you will still be paying the same amount. This can be useful if you feel that there could be a risk that the rate will go up and that you will struggle to cover the payments. Many times this is used by first time borrowers who might be younger and on a lower income and therefore less able to afford more should the payments go up. However, it could be useful for anyone. It is worth making sure that you are aware that the cost of a fixed rate mortgage could be higher though. Firstly, the lender will set the rate higher than their variable rate in case the rates go up as they will not want to lose out. The variable rates may also go down, especially if the base rate goes down, which means that if you are on a fixed rate you will lose out on this reduction in rates.
It is worth noting that sometimes with a fixed rate mortgage you will be tied in to a lender. So, if you choose a rate that is fixed for five years, you could find that you will have to stay with that lender for those five years. This means that if the base rate decreases hugely, you will not be able to take advantage of that reduction in rates and there may be other mortgage lenders with fixed rate deals at lower rates too. You may even find that you get tied in beyond the fixed rate and have to move on to their variable rate for a certain time period before you can move lenders which could mean you are paying an unfavourable rate.
Variable Rate Mortgages
A variable rate mortgage has an interest rate that can potentially change at any time. This means that you may find that you will be paying more or less than you originally signed up to pay as the base rate changes or when the lender decides to change the amount that they are charging you. They will be able to change the rate whenever they wish unless you are on a tracker mortgage. This means that they can put up the rate even if the base rate does not go up and if the base rate falls, they can choose not to decrease the rate. However, mortgages are a competitive business and so they will not tend to be excessive with their charges as they want to make sure that they do not lose customers.
A tracker mortgage will just track the base rate, which means that if it goes down you will pay less, if it goes up you will pay more. This can be great if the rates are falling and you pay less and less but if they are rising you will pay more. However, if they rise variable rates will tend to rise anyway.
So, which type of mortgage will suit you, will depend on what your circumstances are what you think will fit in better with you. It may depend on how confident you are that you will be able to cover the mortgage interest even if it goes up. Some people also just like the certainty of knowing exactly how much they will be paying.