Fixed versus variable rates: which should you choose?

Fixed versus variable rates: which should you choose?
Fixed rate mortgages have proved hugely popular in recent years, but with increasingly attractive variable rate deals on offer, is it time for borrowers to consider other options?

Leeds Building Society has launched a new two-year discounted mortgage with a payable rate of just 0.99% (4.6% APRC) for homebuyers with a 35% deposit to put down, or the equivalent amount of equity if remortgaging. This deal has a £1,999 fee but comes with a free valuation and assistance with legal fees for remortgages.

The Leeds deal undercuts alternative fixed rate options and is the cheapest mortgage deal seen since the base rate went up to 0.75% in August.

However, before rushing to sign up, it’s vital to consider the pros and cons of opting for a variable rate over a fixed deal. Here’s what you need to know.

Should I go for a variable rate deal?

Variable rates are very competitive at the moment, so if rock-bottom payments are a priority, a variable deal could be worth considering.

However, remember that variable rates can go up or down, so you could face higher costs if interest rates rise. Even though discounted variable rates aren’t directly linked to the base rate, they’re still likely to go up if base rates rise, potentially by more than any increase.

If you’re considering a variable rate mortgage, you’ll therefore need to weigh up whether you’d be able to absorb an increase in monthly payments if rates do rise. Our interest rate calculator allows you to see what impact a rate rise would have on your mortgage costs.

Bear in mind too that the most competitive variable rate deals, like Leeds’ new discounted mortgage, often carry large fees, so you’ll need to factor these into the overall cost. As a general rule, deals with high fees are unlikely to be cost-effective overall for those with smaller mortgages.

Benefits of fixed rate mortgages

Fixed rates can provide valuable peace of mind that your monthly mortgage payments won’t change if interest rates rise, with longer term deals proving very popular with homeowners concerned about what will happen to the economy when we leave the EU.

Despite the base rate being held at 0.75% again in November, a rate rise may not be far way, particularly as the governor of the Bank of England has warned that rates could go up even in the event of a no-deal Brexit.

Although variable rate mortgages are currently marginally cheaper than fixed rates, the difference between the two isn’t that significant. So, if you prefer a bit more certainty and think that rates could rise soon, you may consider a small extra cost now worthwhile, particularly if you’d struggle to afford potentially steeper bills in future.

If you’re not sure which type of mortgage to go for, our brokers can talk you through all the available options and recommend the best deal for you based on your individual circumstances.

Representative example A mortgage of £172,114 payable over 19 years, initially 4.70% below the standard variable rate of 5.69% for 2 years followed by 1.00% below the standard variable rate for 3 years, and then at the standard variable rate of 5.69% for the remaining 14 years would require 24 payments of £828.42 then 36 payments of £1,107.37 and then 168 payments of £1,177.93. The total amount payable would be £259,873 made up of the loan amount plus interest (£85,526) and fees (£2,233). The overall cost for comparison is 4.6% APRC representative.

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