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A Look at Fixed and Variable Rate Mortgages

Sep 27, 2018

buying a home

With the Bank of England Base Rate increasing to 0.75% in August, home buyers may be thinking about their mortgage deal and payments, including whether to pick a fixed or variable rate. There are pros and cons for each type of mortgage and here, we take a look at them both.

Variable Rate Mortgages
With a variable rate mortgage, the interest rate that you pay can change at any time throughout your deal period. Variable rate mortgages are normally linked to a bank or building society’s Standard Variable Rate (SVR), which is often influenced by the Bank of England base rate. So, if a bank or building society’s Standard Variable Rate increases, perhaps as a result of a Bank of England base rate increase, your interest rate and monthly mortgage payments will increase by the same percentage. However, interest rates for variable mortgages are often lower than fixed rate deals.

Pros:

  • Variable interest rates are generally lower than fixed rates.
  • If the bank or building society’s Standard Variable Rate was to fall then you’re likely to benefit from lower monthly payments.

Cons:

  • Variable rates do not offer the certainty of knowing exactly how much you will need to pay each month.
  • If the bank or building society’s Standard Variable Rate increases then so would your monthly payments.

If the interest rate applicable to your variable rate mortgage was to increase, you will be given notice and will be told how much your new monthly payments will be.

How often has the Bank of England base rate changed in the last 5 years?
In the last 5 years the Bank of England base rate has changed 3 times, going from 0.5% in 2016 (which it had been since 2009) to 0.25%, in 2017 going back up to 0.5% and in 2018 increasing to 0.75%. However, the Bank of England may change this more frequently in the future than it has over the past 5 years.

How much would my mortgage go up with a mortgage rate increase of 0.25%?
A mortgage of £200,000 over 25 years at 3% repayment would cost around £948 per month.

If the rate of your mortgage increased by 0.25% this would increase your monthly mortgage payments by around £26 a month. Similarly, a 0.25% rate decrease would cost around £26 a month less.

Fixed Rate Mortgages
With a fixed rate mortgage, the interest rate that you pay will stay the same throughout the deal period. The main advantage of a fixed rate mortgage is that even if interest rates were to rise dramatically, your monthly payments would not change for the duration of your fixed deal. However, fixed rate mortgages can often be more expensive than variable rate deals.

Pros:

  • Fixed rates provide the certainty of knowing exactly how much you will need to pay each month, helping you to manage your money.
  • Your mortgage payments will not go up even if a bank or building society increases their Standard Variable Rate. 
Cons:
  • With fixed rate mortgages, interest rates are usually slightly higher than a similar variable rate mortgage.
  • If interest rates were to fall then you would not benefit from any decrease.

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