Should you take a fixed or variable/tracker mortgage deal?
It's one of the most important questions that borrowers face when taking out a new mortgage. Mortgage Introducer recently reported that three in four new UK mortgages in December 2011 were arranged on a fixed-rate basis - up almost five per cent from the previous December. But is a fixed rate the right thing for you?
Fixed-rate mortgages guarantee your monthly repayments for a period of time - typically two, three or five years. Even if general interest rates were to rise significantly during your fixed period, you have the peace of mind that your mortgage payments wouldn't change.
However, the main disadvantage of a fixed-rate mortgage is that you could end up paying more than you need to. If you're on a fixed-rate deal and interest rates fall, you'll continue to pay the same, higher rate.
In addition, you'll normally find that fixed rates come with ‘early repayment charges'. This means that you'll pay a penalty if you want to come out of your fixed-rate deal before the end.
Variable mortgage rates typically change when underlying interest rates change. For example, the interest rate on your tracker-rate mortgage will rise when the Bank of England base rate rises and fall when the base rate falls.
The main advantage of variable rates is that they can often offer lower initial repayments than a fixed rate. Generally speaking, you will also benefit from any falls in interest rates over the term of your mortgage as your repayments will also fall. And variable-rate mortgages are often more flexible than fixed-rate mortgages and offer the ability to make overpayments without penalty.
However, if interest rates rise, you will generally find that your mortgage rate and mortgage repayments will rise accordingly. Steep rises in interest rates could mean a significant increase in your monthly mortgage payments.
When considering a fixed or variable mortgage deal, take the following two factors into account: