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What’s the difference between fixed & variable rate? Which should you choose?

MORTGAGES | 04.02.2021

Whether you’re considering a new mortgage deal or a remortgage, it’s important to understand the differences between a fixed rate and a variable rate of interest, as this can help you save more money in the long run.

We’re going to briefly discuss the differences here so that you can make a more informed decision as to which is the best option for you. Keep in mind that it’s always better to seek out professional advice if you’re unsure.

 

A fixed rate 

As the name implies, this type of mortgage interest rate stays the same, or fixed, for a set period of time, this can vary depending on the deal, but it’s generally between 2 to 5 years.  When the interest rate is fixed it means that any repayments you make during the period will remain the same, until the fixed term ends.  It’s only after a fixed term ends that you’ll be switched onto the lender’s standard variable rate (SVR), unless you opt to remortgage onto another deal, either with the same lender or a different one.  Of course the key advantage of a fixed rate deal is that you can predict what your repayments will be as they will stay the same for the duration of the agreed term. This makes it easier for you to budget and stay on top of your overall finances. However, if interest rates fall and you’re still in your fixed rate term, then your interest rate will stay the same. Meaning there could be a chance you pay more interest than you would on a variable rate deal. Plus, if you wanted to change your deal during your fixed term there will likely be an exit fee. 

A variable rate

This works differently to a fixed rate in that the interest rate can throughout the term of the mortgage, and therefore your repayments can change frequently. There are two main types of variable interest rate - the standard variable rate or a tracker rate. The SVR is actually fixed by your lender and they will have the power to increase or decrease this at any time. Generally speaking the SVR will reflect that of the Bank of England’s base rate, but this isn’t always strictly the case. The tracker rate usually follows the Bank of England’s base rate, which means if the base rate drops so too will your interest rate and vice versa. Usually though, a tracker rate will be higher than the rate being tracked. If you take out a variable rate you could end up with a lower rate and lower monthly repayments, but interest rates may rise dramatically, which could also mean your rates will suddenly increase. It’s a risk and reward option and you need to keep in mind that it’s hard to predict when or if interest rates will change.

Which should you choose?

Of course, there is no right or wrong choice for you to make when it comes to your mortgage rate term. It just depends on you and your individual circumstances. A fixed rate could be ideal for you if you’re after more stability in your current financial situation, and you’re looking for a straightforward budget each month. Keep in mind though that interest rates may drop and therefore you could end up paying more during your fixed term. With the BoE’s base rate at an all time low you could benefit from a variable rate, as long as you’re happy with the risk that rates might rise. 

Speak to the experts

It’s a good idea to seek out the services of an experienced mortgage broker to ensure you are really choosing the right deal for you.  Our team can guide you through all the options available to you, to find you the best deal for your specific circumstances. For more information get in touch with us today on 0345 305 2540, or at info@taylormade-finance.co.uk.
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