The virtues of variable mortgage deals
If you've got the stomach for the ups and down of a variable rate, you could save yourself thousands on your mortgage right now.
It seems like everybody but everybody is trumpeting fixed rate mortgages at the moment.
Lenders, brokers and self-appointed mortgage experts are all telling us to lock into a mortgage rate now, preferably for five years, if not longer.
They say rates have bottomed out, they reckon we'll never get such great deals again, and they think we would be mad to go with a variable rate option.
But isn't it just as mad to pay around 5% for a five-year fixed rate when you can pay closer to 2.5% on some lenders' standard variable rates, or with a best buy tracker mortgage?
On a £150,000 mortgage your monthly repayments if you pay 5% interest would be £877, compared to just £673 if you pay 2.5% -- a whopping difference of £204 a month, or £2,448 a year.
What price security?
A numbers game
The standard variable rates of Lloyds TSB and Cheltenham & Gloucester are just 2.5% for example, as is Nationwide's Base Mortgage Rate (for existing borrowers), and new trackers are available for even less -- the Co-op Bank's three-year tracker is just 2.39%, (for those with a 25% deposit).
In the long-term fixed rate arena, you should expect to pay at a whole lot more. The best buy five-year fix (up to 75% LTV) is 4.59% from Royal Bank of Scotland, with most deals hovering around 5%, if not more.
Of course, it all depends on what your existing lender's SVR is and which trackers or fixed rates are available to you -- but in general medium-term fixed rates are significantly more expensive than tracker deals.
Those who need a fix
Of course, many borrowers need the peace of mind of a fixed rate and the guarantee that their payments will not rise for a pre-determined period. And that's fair enough.
If you are a first-time buyer with other costs to consider, furniture to buy and a tight budget to live on, you might not be able to swallow a future increase in your mortgage payments. Therefore knowing what you need to pay your lender every month over the next five years could prove invaluable.
The same goes if you are planning to start a family or if you simply cannot afford to be hit for six (per cent) by rate rises. Similarly, you might just want to know exactly what your repayments will be for the foreseeable future.
In all of these cases you might prefer a fixed rate since, as long as you are comfortable with the monthly repayments, you can feel satisfied that you know what is around the corner.
It is also the case that mortgage rates have probably bottomed out -- there is no disputing that fixed rates are historically low.
So why can't we all be happy fixing?
Pay less now
Because by taking a variable rate you are able to pay less now. Not just a little less but hundreds of pounds less a month, as the figures above demonstrate. And that is very tempting for many mortgage borrowers -- especially those with large loans who could see even more dramatic savings with a low variable rate.
If you borrowed £400,000 for example and took a long-term fixed rate at 5% your monthly repayments would be £2,338. But if you chose a deal with an interest rate of just 2.5% your repayments would be just £1,794 - a staggering difference of £544 each and every month. That's £6,528 a year!
Of course, it would remiss of me not to mention two obvious points. Firstly, it is not just variable rates that are available at 2.5% or thereabouts. You can also get a short-term two-year fix at around this level (or just above) if you prefer.
Secondly, and more importantly, if you revert to your lender's SVR or take out a low tracker or variable rate mortgage, your interest rate and repayments could rise.
Indeed, it is more than likely they will rise.
The Bank of England Base Rate is at an historic low of 0.5% and the only way is up. But when rates will rise and by how much is anyone's guess. The Governor of the Bank of England recently said that he believed economic recovery would be slow, leading some economists to predict that the Base Rate could stay low for at least the next year.
It is clear there is potential for rates to rise significantly at some stage, but nobody knows when it will happen.
And if you want to pay a very low rate now, plus you can afford for your repayments to go up, a variable rate could well be suitable for your needs.
Some people have modest mortgage borrowings in relation to their income. They are not as fearful of rate fluctuations as they can comfortably afford their repayments at their current level and if they were to rise. And these borrowers may well be willing to take a chance. After all, payment security is not everybody's number one priority.
Indeed, the money you save each month could be set aside, or overpaid into your mortgage in order to give yourself a head start when mortgage rates do increase.
Don't forget, if you revert to your existing lender's variable rate you are free to remortgage at any time. So if rates do start to get too high for comfort you can always jump ship to a fixed rate. Of course, the deals available at the time may not be as competitive as those currently available, but that's the risk you take.
If you go for a tracker rate it could be wise to find a deal with no early repayment charges (known as ERCs), to give you this same flexibility to fix if you decide you want to in the future.
And every month that rates do not rise you can enjoy the fact that you are paying hundreds of pounds less than those on medium-term fixed rates.
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