Upon thinking about your first mortgage, or remortgage, several decisions must be made. The most important of which is to select a fixed rate product or a variable rate product. Another important decision will be the lender or broker you partner with.
Difference between variable rate and fixed rate
The difference between the two options is simple. A fixed rate mortgage or remortgage is a rate which stays the same from the moment you finalize the paperwork with your lender. Fixed rate loan products are great if you seek a consistent, stable monthly mortgage payment over the life of the loan. Regardless of what the bank base rate does, the fixed rate stays the same. The most challenging part of deciding on a fixed rate loan, is predicting when the interest rate is at its lowest point.
While the fixed rate mortgage or remortgage loan product suits those with a more conservative approach to managing their finances, just the opposite can be said about a variable rate. The variable rate loan can change drastically over the life span of the loan. Therefore, it has the ability to save, or cost, thousands of pounds over time. To put it simply, it is best to be in a variable rate situation when the rates seem to be falling over time. It is almost standard procedure for a lender to ask for at least a one year commitment in a fixed or variable rate loan.
At the same time the advantage of a variable rate loan stares you squarely in the face due to the savings possibility, beware. The variable rate loan is equally able to cost you several thousand pounds over the course of that year, if it goes up too much.
The question of length of commitment
Lenders want to work out a win – win situation with you regardless of the loan type decided on. It was previously mentioned that lenders typically ask you to commit to one or the other loan type for at least a period of one year. There is justification for this. One, lenders do not want to be filling out paperwork on all their clients every time they turn around. This just bogs down a day and prevents them from partnering with other people with their loans. The other reason for the one year commitment is so they can make up lost revenues from borrowers who fell into an exceptional situation of month after month falling base rate. In this case, borrowers are able to save pound after pound and the loan becomes less attractive over time for the lender to hang onto. After the year is complete, they can renegotiate and recoup some of the lost revenue which took place over time. In essence, they can turn the loan product back into a win – win situation.
The choice is up to you for the ultimate match
There is no possible way for anyone to predict what the base rate will do over time. From the moment you walk out of the lenders office, either hopes of a change in base rate, or the comforting feeling that everything is going to stay the same, will accompany you. The choice is yours. There is a way to test the waters and see if your monthly budget can handle the change in base rate if you decide to go with a variable rate loan product. Simply look at your monthly outgoings and see if they can be increased by several hundred pounds and still cover your bills. If the answer looks like no additional stress will be applied to your budget, you might think about a variable rate loan product. On the other hand, if things are tight already, the smartest choice will probably be the fixed rate loan product. Just keep in mind, no one can predict the future. Do plenty of research and take plenty of time making your decision. Few things in your lifetime will end up being as big of an investment. This decision deserves your best effort.
