What is a fixed rate mortgage?
A fixed rate mortgage is one where the interest rate is fixed for a set term. This could be 3, 5 or usually up to 10 years at the very maximum. The fixed rates are usually introductory rates offered to lock new consumers in for a set amount of time.
During a fixed rate mortgage the cost to settle(early repayment cost) the mortgage is usually at its highest. The fixed rates stay constant throughout their fixed period and give the borrower some stability in regards to predicting their monthly payments. However if interest rates fall the borrower will not benefit from this fall. In the case interest rates rose a a borrower will however be protected from this increase in monthly payments throughout the fixed term.
At the end of the fixed rate mortgage the interest rate gets switch over to a variable rate. This will either be a tracker rate or a standard variable rate.
Advantages of a fixed rate mortgage
fixed rate mortgages give certainty over the monthly mortgage repayments. If interest rates go up yours wont.
Fixed rate deals give first-time buyers certainty with their monthly mortgage repayments when they get on the property ladderand whilst they attempt to climb the career ladder to earn higher wages.
Disadvantages of a fixed rate mortgage
If interest rates fall you will not benefit from that fall as you would on a tracker rate mortgage.
The costs to settle a fixed rate mortgage are very high and the mortgage fees associated with getting a fixed rate mortgage are just as high
What is a variable rate mortgage?
A variable rate mortgage will either be a standard variable or tracker rate. This are mortgages that can either go up or down. A tracker rate mortgage is one which tracks the Bank of England base rate whilst the standard variable rate mortgage is set by the bank or mortgage lender and can be moved at their discretion.
The standard variable rate are loosely based on the Bank of England base rate as they are usually one percentage point above.So you will see them follow each other but unlike the tracker rate which is solely based on the bank of England base rate the standard variable rate can be move up and down at any time by your bank or mortgage lender based on the interpretation of economic affairs and their bottom line. Standard variable rates are typically the most expensive rates.
Advantages of a variable rate mortgage
There are typically no early repayment costs and mortgage fees for variable rate mortgages tend to be cheaper.
If interest rates fall your monthly payment may fall if you are on an svr but will definitely fall if you are on a tracker rate.
Disadvantages of a variable rate mortgage
Standard variable rate mortgages are known to be some of the most expensive although tracker rates are somewhat cheaper
If interest rates rise your payments will almost certainly rise and this could leave you unable to afford your monthly mortgage repayments