It’s a question that’s occupying the minds of many homeowners and potential homeowners right now. Considering the current economic climate, which type of mortgage product is best – variable or fixed rate?
The answer to that question is not definitive but it is possible to make a well-informed, educated guess. Consult different economists and independent mortgage brokers and you may well get a range of responses.
Whether or not you ultimately go for a variable or fixed rate mortgage partly depends on your circumstances. If you’re a first time buyer looking to purchase a property with monthly repayments set as low as possible, a variable may at first seem to be the most attractive prospect. If you have a relatively low deposit (by current standards) of say, 10%, you will only have access to a limited number of variable and fixed rate mortgage products. You’re more likely to get a variable or variable rate deal than a competitive fixed rate for three or more years.
If you are in a position to choose between a number of variable or fixed rate mortgage products, think very carefully about your selection. Although interest rates are currently incredibly low, they may not be for long. It’s possible you may save money in the short run but what about the long term? Monthly repayments on fixed rate mortgages are generally higher (at the moment) than their variable and variable rate counterparts. However, if interest rates go up, that state of affairs can reverse rather rapidly.
Andrew Montlake of mortgage brokers Coreco recently told BBC News:
“I think inflation is a serious potential issue for the UK and will be harder to tame than some believe, especially as we move into an economic recovery over the next couple of years, together with other global pressures such as oil and commodity prices.
I therefore do think that the Bank rate will rise, albeit slowly at first, starting in May this year and, barring any serious unforeseen event, reach between 2.5% and 3% over the next two years.
I also believe there could be a possibility that Bank rate will have to rise further towards the end of 2013. So I think there is a very good chance that Bank rate will be at 2.75% before the end of 2013 and possibly even by the end of 2012.”
In short, if you want security and peace of mind, it’s probably best to go with a fixed rate mortgage for two, three or if possible, five years. If you are the type of person who will worry about rate rises, a fixed rate mortgage product will mean less sleepless nights!
Variable mortgages are by their very nature riskier prospects and rates go up and down depending on what the powers that be at the Bank of England dictate.
Still can’t decide between a variable and fixed rate mortgage?
Make a few of your own calculations about the potential possibilities for a variable. Literally sit down with a calculator and find out what would happen to your monthly repayments if your lender increased their rates – as the Cooperative Bank has just done.
Source: BBC News.