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While those on fixed rate deals remain unaffected by higher mortgage rates, the challenges are presented to those approaching the end of their current mortgage term or entering the market for the first time.
As market conditions shift, more individuals may turn to variable rate mortgages, particularly tracker mortgages thanks to their flexibility, especially those that come with no early exit charges.
The interest rate on a variable rate mortgage varies in response to economic or financial market shifts, resulting in potential changes to the borrower’s monthly payments, either upward or downward. There are three main types of variable rate mortgages: tracker rate mortgages, discount rate mortgages, and standard variable rate mortgages.
Tracker rate mortgages, also known as variable rate trackers, follow the Bank of England base rate, offering variability that aligns with the broader economic environment. This means your mortgage repayments can go up or down. This can be particularly advantageous for those who wish to avoid locking into a high fixed mortgage rate but find themselves approaching the end of their existing mortgage product.
Discount rate mortgages
A discount variable rate mortgage offers a discount on the lender’s standard variable rate (SVR) for a certain period. The SVR is set by the lender and can change at their discretion. The discount rate can change along with the lender’s SVR. This is slightly different from a tracker mortgage in that the prevailing rate does not necessarily follow the Bank of England’s base rate movements.
Standard variable rate mortgages
Standard variable rate (SVR) mortgages are a type of mortgage where the interest rate is set by the lender and can vary over time. SVR mortgages are often the default rate that borrowers move to once their initial fixed or discounted rate period ends. Borrowers on an SVR mortgage are likely to be paying more interest than necessary.
The main difference between a fixed and variable rate mortgage is in the monthly mortgage payments. The monthly mortgage payments for a fixed rate mortgage will always be the same for the length of the product, regardless of interest rate movements. However, you will usually have to pay an early repayment charge (ERC) if you leave the product early. The main benefit of a fixed rate mortgage is certainty in monthly mortgage repayments. Variable rate mortgages fluctuate depending on the wider economic and financial market.
The discussion around fixed and variable rate mortgages differs for the residential and buy-to-let (BTL) market.
For a residential mortgage, there are several factors to consider when choosing between a fixed rate and variable rate mortgage.
The main benefit of a variable rate mortgage is that the borrower may be able to reduce their total mortgage payments if the rate remains low for a substantial period of time compared to a fixed rate mortgage. However, a variable rate is a riskier option as the rate fluctuates, and thus many borrowers prefer the certainty of a fixed monthly mortgage payment.
Some lenders also offer benefits for choosing a longer-term fixed rate mortgage. If all borrowing is on a 5-year fixed rate or greater, some lenders stress at a lower rate and may lend more.
Choosing to fix your mortgage or opt for a variable rate is an important decision. A mortgage consultant will consider your individual circumstances, deposit and borrowing required. They can recommend the best deal for your circumstances and understand which lenders can help you achieve the level of borrowing you require.
In the buy-to-let market, potential rental income is considered when assessing borrowing. Lenders carry out a stress test for fixed and variable rates to work out the maximum borrowing. This can vary if fixing the rate for five years or longer. The lower the stress rate used by the lender, the higher the borrowing an investor can achieve for a given rental income. Lenders consider the projected rental return to cover, allowing some exceptions for limited companies or lower rate taxpayers.
Choosing a fixed rate or variable rate for your buy-to-let mortgage is therefore not just about your expectation of rates, security and flexibility required, but also the borrowing level required. The decision of whether to fix your mortgage rate or opt for a variable rate is a complex one and a decision not to be taken lightly. If you are a landlord or would like to know more about how much you can borrow with a variable or fixed rate mortgage for your buy-to-let investment, our consultants can help you calculate the numbers, considering your individual circumstances.
There’s no one-size-fits-all answer whether someone should take a fixed or variable rate mortgage. In a frequently changing mortgage market, it can be an especially tough time to know which option is best. We explain more about the benefits and disadvantages of both fixed and variable rate mortgages here.
If you’re coming to the end of your current mortgage deal or taking out a new mortgage, our experienced consultants can help you understand your options, taking into account your individual circumstances, deposit, and monthly mortgage repayments, helping you to make informed financial decisions.
Please remember that your home may be repossessed if you do not keep up repayments on your mortgage.