If you are a homeowner, or even if you are thinking about buying a home, you will want to get the best deal that you can on your mortgage. In this article we look at the benefits of variable rate mortgages.
Fixed mortgages have long been the popular choice among homeowners for the security and stability that they provide. However, perhaps ironically, in these uncertain economic times variable interest rate mortgages may actually make more sense for many homeowners.
For new owners, or anybody thinking about remortgaging, is the advantage of lower arrangement fees for mortgage products. Fixed or tracker rate mortgages providers can charge in the region of £600 to arrange the mortgage, while variable rate mortgages usually attract no arrangement fee.
Other advantages include the potential to take of advantage of improved rates on low loan-to-value (LTV) mortgages. For example, a variable rate mortgage with a 75% LTV will attract a much lower interest rate than a mortgage with a LTV of 95%. 100% LTV mortgages have become a thing of the past, at least for the time being, with the global credit crunch making loans and mortgages much harder to get.
And as banks continue to hedge their bets, some are even increasing the rates of their fixed rate products even though the Bank of England has been cutting rates. If this trend continues, we could see a very significant gap opening up between the cost of fixed and variable rate mortgages as lenders pass on interest rate reductions to variable rate customers, but not to fixed rate customers.
There are also more traditional advantages to taking out a variable rate mortgage. These have traditionally been the choice of homeowners who are looking for more flexibility in their mortgage. With a variable rate mortgage you can usually make early repayments, take payment holidays or even pay off your mortgage in full without the penalties you could face with a fixed rate mortgage.
For the moment, variable rate mortgages remain more expensive than fixed rate mortgages when it comes to monthly repayments. However, a lot of this is eaten into by expensive arrangement fees and if current trends continue, fixed rate mortgages could end up more expensive in the near future.
Using current Nationwide mortgage rates as an example, a person borrowing £100,000 over 25 years with a LTV of 75% will pay 5.75% on the mortgage if it is fixed for three years. Repayments will cost £629.11. For the same mortgage at the 6.7% variable rate the repayments will be £690.28. However, given the £599 arrangement fee for the fixed rate mortgage, it would take 10 months to recoup the cost of this extra charge.
This is almost a third of the three year fixed rate term.
A lot will depend on what direction interest rates and banks will take in the coming year or so. However, there is a distinct possibility that variable rate mortgages will provide better value for money going forward. Also bear in mind that you can always switch from a variable to a fixed rate, while going in the opposite direction is not so easy.
|Type||Interest Rate||Monthly Payment||Arrangement Fee|
|3 Yr Fixed||5.75% Fixed||£629.11||£599|
|Base Rate Mortgage||6.7% Variable||£690.28||£0|
Assumes £100,000 mortgage with 75% loan to value, over 25 years.