Fixed rate mortgages
As implied, a fixed rate mortgage is tied to a specific interest rate. This is set out at the time the mortgage was established, and is fixed in place for a pre-determined period. This could be for 2 years, 3 years, 5 years or potentially longer. The benefit of a fixed rate mortgage is the fact that it does not change for that period. This is great for planning, stability and peace of mind around fixing your costs for a certain time ahead.
Interest rates can fluctuate, dependent upon the state of the economy and a wide range of external factors feeding into it. By their nature can be varied over time. If you have a fixed rate mortgage set when interest rates were generally low, then you would be protected against any sudden rises in bank interest rates. Consequently, you can continue paying the same repayments each month.
Conversely, variable-rate mortgages broadly follow bank interest rates, moving up and down over time following global events and economic activity. This means that where we have seen unprecedented low interest rates in recent times, your variable rate mortgage repayments will be low to reflect this. However, should these start to rise again, your monthly repayments will rise alongside this.
Within variable-rate mortgages, there are different types further. A ‘Tracker’ mortgage will follow the Bank of England interest rate exactly. Whilst a ‘Standard Variable Rate’ (SVR) can be a few percentage points above the Bank of England interest rate.
There could also be opportunities to apply for Discounted rates. This is where lenders offer a few percentage points discount from the SVR for a pre-defined period of time. Finally, there are hybrid options of capped mortgage deals, variable rates but with caps to ensure the interest rate doesn’t fluctuate past a certain point.