fixed or variable rate?

trixipaws

we were on a fixed rate mortgage since before the recession and when the contract expired we were automatically put onto the standard variable in late 2009 which was great as was almost £200 less per month!

how do fixed and variable rates and the economy all work?

would it be wise to get another fixed rate before the economic recovery, have i guessed that right??

can someone explain the pros and cons of fixed and variables and opinions on whats best thing to do in this climate!

[Deleted User]

Fixed

Pros - you know what you're paying, every month for a set period of time
- if rates go up, it doesn't matter, you still the pay the same
Cons - when you fix, you will be fixing at a rate higher than non-fixed rates
- if rates don't go up, or go down, you won't pay any less
- you will pay an ERC to come off the fixed rate before the end of the term

Variables
Pros - cheaper than the equivalent fixed rate at any given time
- benefit from low rates at present
- you can move to a fixed rate at any time with no ERC
Cons - if rates rise, so does the amount you pay
- when rates start to rise and you want to jump to a fixed, they fixed will be more expensive than they are now

To give you a VERY rough idea of how to view it -

Let's say your variable rate is 3% today, but you could fix for 5 years at 5%.

If you stayed on the variable rate, it would need to rise on a straight line increase to 7% after 5 years (being around 5% after 2 and a half years) for you to pay the same as the fixed (ignoring fees).

The best thing to do? Depend on how nervy you are, your view of the economy and market, what you can afford, how long on you mortgage, etc. Up to you.

TrickyDicky

If you cant afford a 5% increase in the rate, it might be safer for you to fix. But if you fix the rates might not go as high as the fixed rate - it's your gamble.

But while you're deciding, why not overpay the mortgage by the £200/month you have saved and reduce the mortgage term (or reduce the compulsory monthly payments?)

koexelek

Difficult to advise without knowing what the current standard variable rate is that you are paying.

michaels

Misread, removed

Spangled

It does also depend on the size of your outstanding mortgage.

If, for example, you have a (relatively small) £50k mortgage, you could arguably take the risk of a variable rate or tracker deal as any increases in interest rates won't affect the size of your repayments as much as if you have, say, a £150k or £200k mortgage.

Some figures on a £50k repayment mortgage over 25 years:

5%: £295
10%: £459

Some figures on a £150k mortgage over 25 years:

5%: £886
10%: £1,377

But arguably more important is the size of your monthly repayment compared to your monthly salary. If the size of your current repayment amounts to a sizeable chunk of your monthly available cash, then a fix would seem a safer option.

As previous posters have commented, there are lots of variables to consider - try approaching a whole of market mortgage broker for detailed advice.

Good luck!