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Should I take a fixed or variable rate mortgage?

Should I take a fixed or variable rate mortgage?
The Bank of England Base Rate fell to 0.50% in March 2009 which at the time was an all time low.  Since then the debate has raged about when borrowers should expect to see a Base Rate rise and how quickly it could start to climb.

That was until the EU referendum, the result of which has changed the complexion of the economic outlook, culminating in a cut to Base Rate by the Monetary Policy Committee in August.  That has left Base Rate at a new record low of 0.25% and there's even talk of whether there may be a need for a further cut.

Will I benefit if rates fall?

With a cut in rates it's no surprise to see more homebuyers and landlords asking whether they will benefit from a reduction in their monthly mortgage payment.

That will depend on their current deal but broadly breaks down into the following categories:

Fixed Rates - these rates do exactly what they say on the tin and will not change no matter what happens to Base Rate.  

Base Rate Trackers - these are variable rates that are directly pegged to the Base Rate and should therefore follow any cut down, giving an automatic fall in monthly payments.

Occasionally a tracker rate will have a minimum rate, sometimes referred to as a collar or floor, which will be detailed in the original mortgage terms and conditions.

Standard Variable Rate (SVR) - Lenders are not obliged to alter their standard variable rates when Base Rate moves.  Although many lenders have applied the 0.25% cut in their SVR there is no guarantee and any further cut to Base Rate will not necessarily be matched by lenders.  

Discounts - Discounted rates are generally linked to the lender's SVR so any fall will depend on whether the lender applies the cut.

So is a variable rate the best option for me?

It's one of the big dilemmas that mortgage borrowers face and unfortunately there are no easy answers, as no one knows how interest rates will alter in the months and years to come.  

Traditionally, variable rates tend to be lower than a corresponding fixed rate and carry the added benefit that they could get cheaper if Base Rate was to fall further.  Of course if interest rates start to climb then payments will also rise. Borrowers therefore need to have enough slack in their budget to cope with that.

If they are anxious about the impact of future rate rises then a fixed rate is likely to be a better option.  On the downside there is no potential for a fall in payments if Base Rate is cut but it's all about gauging your priority and whether the security that a fixed rate provides is more important.

What about buy-to-let landlords?

Landlords will largely take a similar approach in deciding what deal will suit them best, depending on how much budgeting certainty they would like.  With lots of change in Buy to Let, such as the stamp duty surcharge and changes to tax relief, some stability in mortgage costs may well appeal.  

Those with a larger portfolio of rental properties might like to hedge their bets to a degree by putting some of their borrowing on a fixed rate and some on a variable rate.  That will mean that they are not fully exposed to a Base Rate increase but will partially benefit from any cut. 

So will more people opt for variable?

There's no doubt that more borrowers will be eyeing the potential for another cut and variable rate uptake has increased very slightly.
 
However, fixed rates are so competitive at the moment that there is little or no price advantage in a variable rate.  As a result it would be no surprise to see fixed rates continue to dominate as more homeowners decide to lock their rate in at the low.

We've teamed up with L & C Mortgages to offer you fee free mortgage advice, head to their website or telephone (0800 923 2045) one of their expert mortgage advisers today to look into your mortgage options.