Should you go for a fixed or variable rate mortgage?

January’s base rate freeze came as no surprise after nearly three years of no change. In fact, some experts are now forecasting that interest rates will remain frozen at 0.5% until as late as 2016.


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But if you are a homeowner coming to the end of your current mortgage deal, this situation presents something of a dilemma – should you take a fixed or variable rate deal?

According to some number crunching from MoneySupermarket, variable rate mortgages are the flavour of choice at the moment, with more than  3.5 times as many people searching for discount or tracker deals, as those searching for fixed rates. 

But it’s important to do your homework before arriving at any decision – and this starts with establishing how the different kinds of deals work.

The difference between fixed and variable rate mortgages

There are two types of variable rate mortgages: trackers and discounts.

Tracker mortgages mirror the base rate by a certain margin above. They tend to be priced cheaper than fixed rate deals as the mortgage lender is not offering any guarantee that your rate won’t rise over the term of deal.

Discount mortgages, while still variable, work differently. They’re linked to the lender’s own Standard Variable Rate (SVR) by a given percentage below, instead of the base rate.  SVRs are priced independently by lenders – HSBC’s is 3.94% for example, while Santander’s is 4.24%.

Even though it’s unlikely, each bank and building society is at liberty to change its SVR whenever it chooses. This means that your mortgage rate – and therefore monthly repayment – could rise even if base rate doesn’t.

Fixed rate mortgages, as the name suggests, offer a set rate over a given term. This protects the borrower from interest rate rises during that time. The rates tend to be higher than those on the leading variable deals because you are paying for the peace of mind.

Making the right long-term choice

Tempting as it may seem to base your decision solely on price, whether you opt for a variable or fixed rate mortgage should come down to your own circumstances.

Base rate is not predicted to rise anytime soon, but not even economists have crystal balls. If you are worried about your budget – perhaps you are a first-time buyer or even an existing homeowner concerned about the security of your job – an affordable fixed rate is likely to be your best option.

If, on the other hand, your budget can withstand a hike in interest rates, it’s worth taking a look at the cheap tracker and discount mortgages on offer. Try experimenting with online mortgage calculator to see what your monthly repayments would be at different rates of interest.

For example, a £250,000 repayment mortgage taken over 25 years would cost £1,185 at a rate of 3%. If this was to rise to 3.25%, repayments would go up by £33 to £1,218. But if your rate soared to 6% you would have to find an extra £426 a month to support a mortgage repayment of £1,611.

The best discount and tracker deals

Once you have established the right kind of mortgage for you, it’s important to shop around for the cheapest deal in that camp. In all cases, the bigger deposit you can muster, the lower the rate you will pay.  So what are the best deals on offer?

If you can lay your hands on a 40% deposit, HSBC is offering a market-leading discount mortgage currently priced at 1.99% for two years with a £1,499 arrangement fee.

The best two-year tracker is from HSBC’s sister bank, First Direct and is also priced at 1.99% with a £1,499 fee. This deal requires a lower deposit of 35%.

If you are unsure about a variable rate deal but want access to a potential long-term cheap rate, a lifetime tracker that allows you to leave penalty-free at any time, could be a good option.

HSBC is offering a 2.49% deal that tracks base rate for the life of the loan in return for a 35% deposit. There are no upfront fees or early repayment charges (ERCs).

Borrowers with smaller deposits, but who still want to opt for a variable rate, will pay more – although competitive deals are still available.

For example, for a 10% deposit, HSBC is offering a two-year discount priced at 3.84% with no fees while Mansfield Building Society is offering a three-year discount priced at 4.19% with a £599 fee.

The best fixed rate deals

If you decide you want to fix in your mortgage rate, HSBC and Santander occupy the top two market-leading slots, offering rates of 2.28% and 2.35% respectively for two years with fees of £1,999 and £1,995. But again, each require fat deposits of 40%.

Borrowers with less than this should look at Cumberland Building Society’s 2.98% three-year fix which is available for a 25% deposit and comes with a £1,499 fee.

Even borrowers with just a 10% deposit can still access rates of 3.99% with Leek United Building Society. The rate is fixed until January 2015 and requires a £995 fee.

If you are seeking longer-term peace of mind, HSBC is offering a  five-year fix at 4.89%. There is no arrangement fee and the product is available for mortgages up to 90% of the property’s value.  

Bear in mind that pricey ERCs are almost always payable during the term of any mortgage deal. Especially if you are tying in for five years, think carefully before signing on the dotted line.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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