With a variable rate deal, your monthly payments can fluctuate. On the plus side they can go down in times of falling interest rates but conversely they can rise if interest rates are on the up.
A fixed rate on the other hand gives the peace of mind that your mortgage payments won’t change for a set period of time – this is usually two or five years, but other fixed terms are available.
However, the cost of this security comes at a premium as rates on fixed rates tend to be slightly higher than those on variable rate loans – at least when you take the loan out. That said, if interest rates rise the benefit of going for the lower variable rate can be wiped out, so a fixed rate doesn’t necessarily work out to be more expensive over the term of the loan.
Therefore, when deciding whether to go for a fixed or variable rate, you need to think about what level of risk you’re prepared to take.
If you’re happy to take a little bit of a gamble, then you might prefer a variable rate in order to benefit from lower monthly payments initially. However, you need to think about what would happen if interest rates were to rise. Would you still be able to afford your mortgage payments?
Finally, if you do decide to fix, think about the length of the term you are prepared to lock in for. Most deals will charge a penalty known as an early repayment charge, if you need to redeem your mortgage during the fixed term. This can cost thousands of pounds, so it’s definitely a charge worth avoiding if at all possible.