There are lots of different mortgage lenders and types of mortgage and whether you are taking out a mortgage for the first time or remortgaging, it can be tricky to decide which lender will be the best for you. It is a good idea to think carefully about this as it could make a really big difference to how much you pay in total for your mortgage. Although you will be able to switch lenders, it is not something you will want to have to do too often as there can be costs associated with it and it is a hassle. You may also be tied in with some mortgage companies and so you may not be able to switch that easily. You will therefore need to a lot of thinking before you sign up. One of the first decisions you will need to think about is whether to go for a fixed or variable interest rate. This can be a tricky decision to make so it is worth finding out more about the different types of rates and the pros and cons of using them,
What is a Variable Rate?
A variable rate mortgage is where the interest rate that you pay can vary. This means that the lender is able to change the rate whenever they want to. This is often done as a result of the Bank of England changing the base rate but it can be done at any time.
Pros and Cons of a Variable Rate
With a variable rate you will tend to have a lower interest rate. However, if the rates go up then you will end up having to pay more compare with a fixed rate which cannot go up. It can potentially be a cheaper way to borrow if rates do not rise, but it is very hard to predict whether they will go up or not. Of course, there is always a chance that the rates will go down as well. If the Bank of England base rate goes down then the lender may also put their rates down. This can mean that you will end up paying less, which is great, but unless you have a tracker rate then the lender may choose not to put their rates down. However, as you will not be tied in, you cam always switch to a cheaper lender if you feel that yours is no longer competitive.
What is a Fixed Rate?
A fixed rate is where you stay on a certain interest rate for a certain time period. This period will not be for the full length of the mortgage but it is likely to be for a number of years, perhaps up to five years. How long you are fixed for and the rate you are fixed at will vary between lenders.
Pros and Cons of a Fixed Rate
The appeal of a fixed rate for many people is that their repayments will not go up. This means that if the Bank of England puts the rates up they will be protected. If the borrower is already only just managing to afford their repayments, this will protect them against the risk of having to repay more. However, if the rates go down, they will not benefit either which means that they will continue to pay the rate they have always been paying. If rates go down a lot, then this could mean that their mortgage will be very expensive. Also, with fixed rate you are often tied in. This means that you often have to stay with that lender for a certain period of time. This might be several years or longer. It can mean that you will not be able to swap to a cheaper lender.