When you are looking to secure a mortgage for a new home, you have the choice of fixed rates and variable rates. This can make what is already a difficult and stressful decision even worse. Do not worry though as the following article contains lots of helpful information relevant to your choice.
While understanding the basics of fixed rate home loans and alternatives such as variable rate home loans at Newcastle Permanent can be relatively easy, it’s actually deciding which one that is best for you that is harder.
It could be argued that when there are low mortgage interest rates, it is a good time to take a risk with a variable interest rate; however, it is not quite as simple as that.
Variable Interest Rate Home Loans
There are two varieties of variable rate mortgages you need to be aware of – standard and tracker variable. While it is true that for the most part loan companies and financial organisations follow major banks’ base interest rate; with standard variable interest rate loans, the rate is often whatever a particular company wants it to be.
In general though, the chance of a lender setting their variable interest rate to something monumentally high is unlikely due to negative press, public scrutiny and competitive pressure.
Tracker mortgages do follow major banks’ own base rate, which means the repayment rates will change according to the UK national rates. Most companies tend to add a percentage point or two above that number, though not much more.
Fixed Interest Rate Home Loans
On the other hand, fixed rate mortgages basically tell you how much interest you will have to pay back on your home loan over a fixed period of time. The rate is neither affected by major banks’ base rate or adjustable over the allotted period of time.
As a result of securing a set interest rate for the repayment period, there will normally be a high penalty fee in place if you miss payments. Fixed interest rates are normally calculated by lenders based on estimates of how interest rates are likely to change over the agreed repayment time.
Although the calculation is definitely made with the company’s profit margins in mind, it can be helpful knowing exactly how much you will have to pay back.
Variable Or Fixed?
Since 2009, the interest base rate of banks has been reaching record lows and it is not expected to rise much until at least 2016. As noted earlier, it may seem like the ideal time to get a variable rate home loan because of the low base rate. However, there is always a risk, as no-one knows with certainty when and how suddenly or dramatically interest rates will change.
If you have no back up plan and require stability with regards to how much you can pay back though, you are better choosing a fixed rate loan.
If you want to take a gamble and choose a variable rate home loan though, do so with a plan in place so you know how much you could lose if interest rates take a sharp increase.