The UK property market is beginning to show signs of recovery and this is being helped by the Bank of England keeping the Base Rate of Interest at 0.5% for well over a year. This has provided many homeowners with the opportunity to obtain cheaper interest rates on their Mortgage but it is still difficult to know whether a fixed rate or variable rate is best.
Mortgage Lenders’ Standard Variable RateA large number of people have had a fixed rate mortgage for the last few years, and standard practice when this deal expires is to look for an alternative fixed rate product as apposed to remaining with a lender on a standard variable rate.
However with interest rates staying at a record low many Banks and Building Societies are currently offering excellent products to existing mortgage holders through their standard variable rate. This rate is normally higher than fixed or tracker rates but not at the moment. This is good for many property owners with a mortgage as the rate paid is considerably less than alternative fixed or tracker rate deals being offered by the same lenders.
The consideration to make if on a lender’s standard variable rate is that the lender can increase this rate at any time and at any amount. Although indirectly linked to the Bank of England’s base rate of interest this does not necessarily mean that the lender will keep their standard variable rate in line with the wider economy.
Fixed Rate Mortgage
A fixed rate mortgage is a product that offers an interest rate that will be fixed for a period of time, usually between two to five years. During the fixed rate period, regardless of interest rate fluctuations, the rate will not change. The advantage to the borrower is that it is far easier to budget monthly outgoings, especially given the fact that mortgage repayments are usually the biggest monthly expense.
The potential disadvantage is if interest rates fall during the fixed rate period the mortgage rate payable maybe higher than the fixed rate. However the benefit of being able to budget effectively usually outweighs this potential disadvantage.
Variable Rate Mortgage (Tracker Mortgage)
A variable rate mortgage, usually referred to as a tracker mortgage, is directly linked to fluctuations in the Bank of England’s base rate of interest. The tracker product is set at a percentage above the Bank of England’s rate and moves in line with changes in the base rate of interest.
The advantage to the borrower is the ability to make the most of periods of lower rate of interest. This is obviously offset by the fact that interest rates may rise during this time.
Mortgage and Financial Advice
Seeking expert Mortgage and Financial Advice will provide greater insight into mortgage options and an advisor will be able to provide all the terms and conditions attached to the most appropriate product. The key consideration is to whether any increase in the interest rate during the product term is affordable, and if this is unlikely to be the case a safer, fixed rate product may be the most suitable.