As a first-time buyer looking to arrange a mortgage, you may be confused as to where to start with so many options available. One of the main decisions to make is whether you prefer a fixed or variable rate. Here, we’ll explain the differences between the two to help you decide which is best for your budget and needs.
Fixed rate mortgages
With a fixed rate mortgage, your interest rate is fixed for a set amount of time, which is typically 2 to 5 years. This means that it cannot change during the deal period, no matter what’s happening with interest rates in general. It gives you peace of mind that you won’t have to pay any more should interest rates go up. On the downside, you won’t benefit from a reduction in your mortgage payments should rates in general come down.
Having a fixed rate lets you know exactly how much you’re going to pay each month for your mortgage. This is great for budgeting purposes. As you have the security of knowing your rate won’t change for the deal period, a fixed rate tends to be higher than a variable one.
If you wish to leave your deal early, you’ll more than likely be penalised with an early repayment charge (ERC). This can be very costly. Therefore, think carefully about taking a fixed-rate deal if there’s a possibility you may need to leave it early.
Variable rate mortgages
With a variable rate mortgage, your interest rate fluctuates so that your mortgage payments can go up or down throughout your deal. This allows you to benefit from lower payments when your interest rate goes down. However, you take on the risk of having to make higher payments if your interest rate increases. There are a few types of variable rate mortgages to be aware of, as detailed below.
A tracker mortgage
This type of mortgage tracks an external rate, which is usually the Bank of England base rate. Your interest rate is set at a percentage above the base rate. This means that you can determine what the change will be to your mortgage payments based on any changes made to the base rate. As the base rate is reviewed eight times per year, this is slightly more predictable than the other types of variable rate mortgages.
Typically, tracker deals are offered for a set period of 2 to 5 years, although longer options are available. If interest rates are low, a tracker mortgage can be a good choice for you as a first-time buyer. However, you need to bear in mind that interest rates can go up as well as down. You need to ensure that you can still cover your mortgage payments should this happen.
The interest rates offered for tracker mortgages tend to be lower than those for fixed-rate deals, making them appealing. You may be tied to an introductory period and subject to an ERC if you wish to leave your deal early although not all lenders attach this fee to their tracker mortgages. Our mortgage brokers can check the terms of different tracker mortgage deals to help you weigh up the costs.
A standard variable rate mortgage
The interest rate for this type of mortgage is set by each lender at their discretion. It can change by any amount and at any time, with little or no warning. As such, it tends to be higher than other rates, is unpredictable and doesn’t allow you to budget for your payments.
You are usually moved on to your lender’s standard variable rate (SVR) once your initial fixed, discount or tracker deal has ended unless you have arranged a new deal to switch to.
The good thing about staying on a standard variable rate mortgage is that you’re not tied to a deal. You can change to a new deal, make overpayments or repay your mortgage early without being penalised by an ERC.
A discount mortgage
The interest rate for a discount mortgage is set at a percentage below the lender’s SVR. As such, it can change at any time and is unpredictable. However, you can rest assured that your rate will always be cheaper than the SVR. If you wish to leave your deal before the introductory period has ended, you’ll more than likely have to pay an early repayment charge.
Is a variable rate mortgage a good idea for first-time buyers?
Whether or not a variable rate mortgage is best for you depends on your circumstances. As having a mortgage is such a huge financial commitment, first-time buyers tend to choose fixed rate mortgages.
Having a fixed rate helps you stay within your budget and get used to making your monthly mortgage payments. As you’re buying your first home, it’s likely that you’re also going to be paying for furniture and items to decorate your home. Not to mention the other living costs that you need to budget for.
If you don’t need to stick to a particular budget, however, and aren’t concerned with having the certainty that a fixed rate offers, then a variable rate may suit you. A tracker mortgage is the most predictable of these. Usually, although not always, it offers a better interest rate than a fixed-rate deal.
If your interest rate falls, you can benefit from lower payments. However, you need to have adequate funds to cover higher payments should your interest rate go up. The lender will check your affordability for this before approving you for a variable rate mortgage.
We can find the best first-time buyer mortgage for your needs
Our mortgage brokers are here to ensure that you have the best mortgage deal to meet your needs. They can help you decide which type of mortgage to opt for, explaining the differences between fixed and variable rate mortgages in a straightforward manner that removes any complexity. They can also advise you of schemes that are designed to help first-time buyers. For example, the First Homes scheme, Deposit Unlock and the 95% mortgage guarantee scheme.
Offering you impartial advice, our mortgage brokers can compare the deals available, including exclusive broker-only options that aren’t advertised to the public. When you have all of the information at your fingertips, you can make an informed decision, choosing a mortgage that suits your circumstances and your preferences. To get started, give us a call on 01322 907 000. One of our friendly mortgage advisers will help you take the next step towards owning your first home.