Fixed Rate or Adjustable Mortgages- Which Suits You Best?

The two primary types of mortgages are Fixed Rate and Adjustable/Variable. With home finance becoming increasingly difficult to get hold of and an uncertain economic future for the UK, it’s understandable (and sensible) to try to get the very best possible deal. So which is the best option? Let’s take a look at the ins and outs of both.

Fixed Rate Mortgages

A fixed rate mortgage works on the principle that you’ll repay a set amount every month throughout the entire period of the loan. This makes budgeting easy for homeowners as things don’t change, so they always know what’s expected of them every single month.

“The main advantage of fixed rate mortgages is that they protect the buyer from sudden increases should the banks suddenly hike interest rates. This also makes them easy to understand” says Newington Green estate agent, Pimlico estate agent, Andrew Reeves.

The main disadvantage is that when interest rates are higher than usual it can make it even harder for those on a tighter budget to afford.

The overall amount of interest you pay on a fixed rate mortgage still varies depending on the length of the term. Usually you’ll be able to choose between periods of 15, 20 and 30 years. Most people opt for the 30 year term because this obviously means a lower monthly repayment. Longer term though, you’ll end up paying much more because the final ten years are spent paying interest.

Adjustable Rate Mortgages

As you’d expect from the name, adjustable rate mortgage repayments can change. The initial interest rate is always set below the market rate and then rises throughout the term of the mortgage. You’ll always get a fixed period of time in which the rate stays the same, then afterwards it will vary at pre-agreed times. “This means the fixed rate period can vary hugely- anything between a month to a decade. When the initial term is over, the loan rate will vary based on the current market rates” Knightsbridge estate agent, Plaza Estates explains.

The biggest advantage of an Adjustable Rate Mortgage is that it is much cheaper than a fixed rate option during the first few years. The lower monthly repayments also allow people to borrow a larger overall amount of money. The fluctuations in the market and differences in terms make adjustable rate mortgages much more complicated to understand, so it’s important to do your research before making a commitment.

When deciding which loan is right for you, you’ll need to ask yourself a few questions:

  • How much can I afford today?
  • Can I still afford a variable rate mortgage if the rates go up?
  • How long do I plan to live in the property?
  • Which direction are interest rates heading in now? Are they likely to stay the same for a while?

If you’re going for a variable rate it might sound like the most attractive option for now, but Kubie Gold advises that it’s best to consider the worst case scenario: “What happens if rates go through the roof? Will you still be able to keep up with your repayment? Repossessions are at record rates right now, and if you don’t keep up with your loan agreements you’re in danger of losing your home.”

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