There is no easy answer to this question as the decision is based on many factors including your attitude to risk, your thoughts on where interest rates are heading in the next couple of years and whether you are happy to pay a premium for peace of mind and your age and experience in the mortgage market. Let me explain further.

Whenever we get asked this question the first thing we do is look at the difference in the monthly cost of a fixed rate mortgage against that of a variable or tracker rate mortgage. If the fixed rate is £700 per month and the variable rate is £690 per month most people will naturally choose the fixed rate in this example as most people believe that interest rates won’t go any lower (The Bank of England base rate is at historically low levels at present) and that lenders have no reason to lower their variable rates in this market – There is more demand than supply so it makes no commercial sense for a lender to lower their rates.

However, if you are faced with a scenario where the fixed rate costs £700 per month and the variable rate is £600 per month the decision on which deal is best for you is that much harder. In my experience of the current mortgage market, applicants who have a more liberal attitude to risk or applicants who are of the mindset that interest rates are not set to rise over the next couple of years and those that have spare cash flow generally would opt for the variable rate as they have the resources to withstand any increase in the variable rate as it doesn’t affect their finances too much if the rate starts increasing.

If you are unsure of where interest rates are heading and are nervous of the economical environment we find ourselves in (Eurozone pressures, high debt mountain etc) then you may still look at the difference in the mortgage cost and still be unsure of which type of mortgage deal is best for you and will ask yourself Variable or Fixed rate? When faced with this question I ask my clients the following question:

“Are you prepared to pay £100 a month more for the peace of mind that your mortgage cost will not increase over the next 2/3/5 years?”

If the answer to this question is YES, then you have your answer and the fixed rate mortgage is the route forward for you. If the answer is NO then the variable rate is the deal for you as long as you are happy with the risks of what every 1% interest rate rise will do to your monthly mortgage cost – We can provide you with these figures so you can make an informed decision.

An interesting fact:

 It is very common to see First time buyers opt for fixed rates for peace of mind as generally the mortgage cost is very new to them and they like the idea of being able to budget to accommodate this new expense.

Since the beginning of 2012 the type of mortgages deals chosen by our clients is as follows:

  • 43% of applicants have chosen a variable or tracker rate
  • 57% of applicants have chosen a fixed rates.

(Source The Mortgage Broker St Neots 22/02/2012)

The above figures don’t give any insight into people’s thoughts on interest rates in the future as we have seen, especially in the early part of the year, fixed rates being pegged very close to variable / tracker rates and why wouldn’t you fix a mortgage rate if it is the same prices as a variable / tracker deal? (Unless you strongly believe that interest rates will fall further or that lenders will reduce the margin of profit they make on their variable/ tracker rates when there is no pressure to do so?)

Comments