Fixed Or Variable? Mortgages Explained

When it comes to buying a your first or a new home it is important that you know where you stand when it comes to how much you can borrow and, even more importantly, what the best way to borrow is. That means choosing between a fixed, variable or tracker mortgage, perhaps even before you’ve contacted an estate agents to start looking at properties.

How much you can borrow will be determined by your income, credit score and existing debts (and those of your partner if you’re buying jointly).

A mortgage company will weigh up the risks of lending to you based on these criteria and will tell you how much you can borrow. It is then up to you to decide on the various products they will be able to offer you.

The Differences – Variable Rate

A variable mortgage is one where the interest rate is adjusted by the lender in response to market conditions and the overall base rate. This could mean you end up paying more or less on a potentially monthly basis in a volatile market. It is suitable for people with a low aversion to risk, as it has the potential to bring lower monthly repayments than you would be paying on a fixed rate mortgage at the risk of paying much higher repayments should the interest rate rise.

The Differences – Fixed Rate

A fixed rate mortgage provides a level of certainty in terms of monthly repayments in that the interest rate is fixed for a number of years, typically three, no matter what happens to the base rate. The only potential downside to this is if the variable falls lower than your fixed rate, which would mean you are paying more than you could have been, but the level of security provided could be worth that if you are a risk averse type of person.

The Differences – Tracker Mortgage

A tracker mortgage is closely tied to the Bank of England base rate (typically). It is usually set just above the base rate, say one percent, and stays that way as the base rate moves. So you could end up paying less or more depending on the overall rate each month. 

It is safer than a variable rate mortgage which could swing wildly in response to the market, but more risky than a fixed rate mortgage in that you might not know what you are going to pay on monthly basis. These are typically offered over a longer term than a fixed rate though, perhaps five years, so offer a bit of added security there.

Conclusion

When you need a mortgage you need to look at your own attitude to risk and at the market conditions now and in the forseeable future (as much as possible!). If you don’t like risk and consider the market to be ‘rocky’, then a fixed rate mortgage is for you, especially if you know you could not afford an increase in your monthly repayments.

If, however, your financial situation is relatively secure and you don’t mind a bit of risk, then either of the other two options could be for you.