Your mortgage: Fixed versus variable

Fixed mortgage rates have plummeted in recent weeks, meaning there is no longer a higher price to pay for the security of stable payments.

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Traditionally, fixed rate mortgages have tended to be more expensive than their variable rate counterparts, but, with fixed rate deals now at record lows, the gap between the two has narrowed considerably.

Base rates have now been held at 0.5% for four years now, and with no sign of a rise anytime soon, those looking to buy a property or remortgage face the dilemma of whether to opt for a fixed or variable deal.

Here, we take a look at how fixed rates compare with variable rates, so that you can decide which type of deal is likely to suit you…

Falling fixes

The past few weeks have seen fixed mortgage rates drop to the lowest levels ever seen and – as the base rate looks set to stay put and competition mounts – there could be even more falls to come.

Chelsea Building Society, for example, is now offering a two-year fixed rate mortgage at just 1.74% – the cheapest of its kind ever offered. However, the deal does come with a hefty £1,695 fee.

Yorkshire Building Society and HSBC, meanwhile, are both offering two-year fixed rates at 1.79%, with fees of £1,345 and £1,999 respectively. You can read more about these new low fixes in Rachel Wait’s article.

But it’s not just two-year fixed rates which have fallen dramatically in recent weeks. There are now several lenders offering five-year fixed rates below 3% for the first time ever.

Yorkshire Building Society, for example, recently launched a five-year fixed rate mortgage priced at just 2.64%, with a £1,495 fee, making it the cheapest five-year deal currently available. First Direct offers a five-year fixed rate deal at 2.69%, but you need a hefty £1,999 arrangement fee.

To qualify for either of these deals you need a large deposit or equity in your home if remortgaging – First Direct requires a 35% deposit, while you’ll need 40% to qualify for the Yorkshire deal.

How variable rates compare

While variable rate mortgages used to be considerably cheaper than fixed rate deals, this is no longer the case.

David Hollingworth at mortgage brokers, London and Country said: “The fixed rates on offer are extremely competitive and in many cases are available on par or at even lower rates than a corresponding vase rate tracker.  Cheaper funding costs for lenders have enabled them to launch increasingly competitive mortgage rates and fixed deals have been falling to new lows.”

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

Tracker mortgages, as their name suggests, track the Bank of England base rate by a certain margin above.

Discount mortgages, while still variable, are linked to the lender's own Standard Variable Rate (SVR) by a given percentage below, instead of the base rate. While it’s uncommon, the lender is at liberty to move this SVR even if base rate doesn’t change.

According to London & Country, the lowest two-year discounted rate currently available is at 1.75% from HSBC – marginally higher than Chelsea’s 1.74% two-year fixed rate .

The HSBC deal is available to those with a 40% deposit to put down who are prepared to stump up the high £1999 fee.  The lowest base rate tracker, meanwhile, is from Platform, the broker arm of The Co-operative Bank, at 1.69% above the base rate, which gives a payable rate of 2.19%. This deal has a £1,040 fee and again is only available if you have a 40% deposit to put down.

Five year variable rates are also similar for five year fixes. David Hollingworth said; “HSBC offers a lifetime tracker at 1.88% above base for life giving a payable rate of 2.38% for those with a 40% deposit to put down, with a £1499 fee.  The initial rate is therefore slightly cheaper than Yorkshire’s five-year fixed rate at 2.64%, but not by a great deal.”

Which is right for you?

With so little difference between variable and fixed rates, for many people it is likely to make sense to lock into a fixed rate deal so that they are protected from any future rate rises.  This is especially important for anyone who is worried about their budget, for example, first-time buyers or existing homeowners who are worried that they could lose their job in future.

David Hollingworth said: “We are seeing that borrowers are actually still keener to shelter against future rate rises, rather than speculate on further cuts.

“Some trackers would not fall in line with base rate cuts in any case as they are ‘collared’ at the current rate – in other words they are already at a rate they won’t fall below.  With little in the way of an upside for trackers, the ability to lock into a fix while rates are at a record low level becomes an easy decision to make.”

However, remember that you will usually have to pay hefty early repayment charges (ERCs) if you redeem any mortgage are during the term of the deal. That means if you are planning locking in for five years, for example, you must be certain that your circumstances won’t change, or, if you are planning to move during this time, that your mortgage deal is portable.

Low rate and flexibility

That said, Coventry Intermediaries has just launched a range of new deals which – very unusually – includes a fixed rate mortgage that doesn’t come with ERCs. Available from Friday, March 8, the lender is offering a fixed rate deal priced at just 2.69% until 30 June, 2016. You will need 35% deposit and £999 in fees – but crucially, will be able to redeem the deal at any time between now and then, without penalty.

This is an exception to the general rule as fixed rate deals almost always come with ERCs. But there are some variable rate deals – in the form of lifetime trackers – that don't and will therefore permit you to redeem the loan at any time penalty-free.

One example is the lifetime tracker from First Direct which charges a current rate of 2.38% (1.88% above base rate) for a £1,699 fee. You will also need a 35% deposit.

While you run the risk of the rate going up (though, as it’s tied to base rate this is unlikely in the near future), if you were unsure of your movements for the few years and required some flexibility this deal with no ERCS – or one like it – could be your best bet.

If you need any more help, contact our mortgage partner, London & Country for free, independent advice on 0844 209 8725.

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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