If you want to remortgage your home, one of the major decisions you will need to make is whether to chose a fixed or a variable interest rate. FSA figures showed that fixed rate mortgages accounted for just under two thirds (62.5 per cent) of all loans between April 2011 and March 2012 with variable rates accounting for most of the rest.
Our guide examines the differences between fixed and variable remortgage rates. We also look at some of the questions that you should ask yourself when choosing a remortgage deal. We start by explaining fixed rate mortgages.
Fixed rate mortgages explained
When you take out a fixed rate mortgage you benefit from the peace of mind that your monthly repayments will be guaranteed for a specified period of time. Your interest rate is fixed at the outset, typically for 2, 3 or 5 years.
Even if the Bank of England Base rate were to rise during the period of your fixed rate, your repayments would not change.
Variable rate mortgages explained
When you take out a variable rate mortgage you can expect your repayments to change as underlying interest rates change. For example, if your variable rate mortgage was linked to the Bank of England Base rate, your repayments would increase when the Base rate increased. Similarly, if interest rates were to fall then you would see your repayments fall.
There are three main types of variable rate remortgage deal:
- Discounted rate – Here, your lender will give you a discount from their ‘standard variable rate’ (SVR). You will normally pay their SVR less a certain amount for a specified period of time
- Tracker rate – Here, your lender will link your interest rate to the Bank of England base rate. As the Bank of England base rate changes, your mortgage payments will rise and fall
- Standard variable rate (SVR) – Here, your mortgage lender is charging their main lending rate. Lenders have complete control over their SVR and can increase or reduce it when they wish. The SVR is the rate you will generally pay on the expiry of any fixed or variable rate deal you have benefited from
3 important questions to ask when choosing your remortgage deal
Are interest rates likely to go up or down?
You will often find that variable rate remortgage deals offer lower initial repayments than fixed rate products. This makes them very tempting as they give you access to the lowest rates. However, if interest rates were to rise then you could soon find yourself paying more than if you had chosen a fixed rate option.
When considering the remortgage deals available you should assess whether you think interest rates will rise or fall. If there is no sign of an interest rate rise then you may choose to benefit from the low rates of a variable product. However, if you believe interest rates were to rise, you may be better choosing the security of a fixed rate remortgage deal.
What can I afford to pay?
Many people have a strict household budget. You know how much you can afford to pay on your mortgage and that you would struggle if your repayments were to exceed this.
In this case, you may be better with a fixed rate remortgage deal. Here, you will know exactly what your repayments will be for a specified period of time and you can budget accordingly.
Conversely, variable rates mean that your repayments could change from one month to the next. If you are happy with this fluctuation – perhaps you prefer lower initial payments or the flexibility offered by many variable rate remortgage deals – then a variable rate could be for you.
Am I likely to want to repay part or all of my mortgage before the end of the deal?
If you take out a fixed rate remortgage deal, you will generally have to pay ‘early repayment charges’ if you repay part or all of your mortgage before the end of the fixed rate. For example, if you take a five year fixed rate deal and you want to pay off half of your mortgage after three years, you’ll generally face a sizeable penalty for doing so.
While most fixed rates are ‘portable’ – meaning that you can transfer the rate onto another property if you move home – they can still be inflexible and restrictive when compared to other types of remortgage deal.
Variable rate mortgages often come with no ‘early repayment charges’. Many of them give you the flexibility to repay capital whenever you like and some also come with offset or overpayment facilities. If this flexibility is important to you, this type of remortgage deal may be best.