Base Rate Drop: Should You Consider a Variable or Fixed Mortgage?
The recent drop in the Bank of England base rate has sparked an increase in enquiries about variable mortgage rates. Many homebuyers and homeowners are wondering whether now is the right time to consider a variable rate deal or if a fixed rate might still be the best option for them. In this blog, we’ll explore the key differences between variable and fixed rates, as well as the pros and cons of different types of variable mortgages.
Fixed vs. Variable Rates: What’s the Difference?
A fixed-rate mortgage means your interest rate is locked in for a set period (e.g., two, five, or ten years). Your monthly payments remain the same, providing financial stability and protection from interest rate fluctuations.
A variable-rate mortgage, on the other hand, means your interest rate can change over time, usually in line with the Bank of England base rate or your lender’s standard variable rate (SVR). This means your monthly repayments can go up or down.
The Appeal of Variable Rates After a Base Rate Drop
Currently, fixed rates are typically cheaper than tracker and discounted products. However, if the base rate falls further, variable products could become more competitive over the mortgage term. For those who anticipate further reductions in the Bank of England base rate, a variable mortgage could be a sensible choice. Additionally, if the variable rate product has no exit fees, it provides flexibility to refinance into a fixed-rate deal should fixed mortgage pricing become more attractive in the future.
There are two main types of variable-rate mortgages: tracker rates and discounted rates. Let’s take a closer look at each.
Tracker Rate Mortgages
A tracker mortgage follows (or ‘tracks’) the Bank of England base rate plus a set margin. For example, if the base rate is 4.5% and your tracker mortgage is base rate +1%, you’ll pay 5.5%.
Pros:
- Transparent pricing: Directly linked to the base rate, making it easy to understand changes.
- Potential for lower payments: If the base rate drops further, your payments will decrease.
- No lender discretion: Unlike SVR-based mortgages, lenders cannot change the rate arbitrarily.
Cons:
- Risk of increases: If the base rate rises, so will your monthly payments.
- Uncertainty: Hard to predict long-term costs, which can make budgeting difficult.
- Some trackers have early repayment charges, limiting flexibility.
Discounted Variable Rate Mortgages
A discounted mortgage offers a reduction on the lender’s standard variable rate (SVR) for a set period. For example, if a lender’s SVR is 6.5% and your mortgage comes with a 2% discount, you’ll pay 4.5%.
Pros:
- Often lower initial rates compared to fixed and some tracker deals.
- Discount can make rates competitive in the short term.
- More flexibility: Some discounted mortgages have lower or no early repayment charges.
Cons:
- Lender discretion: The lender can change their SVR at any time, regardless of the Bank of England base rate.
- Less transparency: Unlike tracker rates, you don’t know how the SVR will change.
- Potential for sharp increases if the lender adjusts its SVR.
Which Option is Right for You?
Choosing between a fixed or variable rate depends on your personal circumstances, risk tolerance, and financial goals:
- If you value stability and predictability, a fixed-rate mortgage may be the best choice.
- If you’re comfortable with some risk and potential fluctuations, a tracker mortgage could offer savings if rates remain low.
- If you’re looking for short-term savings but want some flexibility, a discounted variable rate might be worth considering.
Get Expert Mortgage Advice
With mortgage rates fluctuating and lenders adjusting their products, getting professional advice is crucial. If you’re unsure which option is best for you, speak with an experienced mortgage broker who can assess your situation and recommend the most suitable deal.
If you’re thinking about switching your mortgage or need guidance on the best rates available, get in touch with us today. We’re here to help you navigate the mortgage market and find the right solution for your needs.
