Fixed v variable mortgage

adonis10

No idea which to go for. Can see benefits of both. Any advice?

I do fear how much my monthly payment will
Be when the rates inevitably skyrocket sometime in the future!

G_M

Fixed - probobly more expensive initially. In the future, who knows? You will be certain exactly how much it will cost throughout the period of the fix (2, 3 5 years etc).

Variable - probobly cheaper initially, but is subject to potential change (rise!) at any time.

If you want certainty about your repayments for a while so you can budget, and/or you fear interest rates will skyrocket shortly, then fix.

If you want to pay less to start with, and take a gamble on future rises, variable.

Bear in mind a short fix (eg 1 year), gains you little as there is no security after the 1st year, so unless you think the skyrocket will happen within 6 months or sooner there's no point.

princeofpounds

Short answer is that no-one knows. If we did, we could predict future interest rates perfectly and become multi-millionaires.

Slightly longer answer is this; the market will typically price fixed rate financing to its best guess of what future interest rates will be on average. That average word is important, because if for example you have a 3 year fix at 5%, and variable rates are at 2%, it actually means the predicted rates path will be something more like 2,5,8 than 2,5,5.

The maths is a little more complicated than that, but close enough. You can't rely on the exact numbers but worth understanding the principle.

Now, having said that, fixed rate mortgages will always be priced slightly more expensive vs current expectations than sitting on a variable throughout the period, because you are taking less risk.

So I would urge you to consider your personal situation first and then find the best-priced product that is right for you. If you are on the edge financially then it can be worth fixing despite the cost, because the downside if things go wrong on a variable is more severe than simply having less money to spend at the end of the month. But if you find repayments comfortable even at much higher rates then having a variable could be best.

Also, maybe you have a strong view on interest rates that is more accurate/lucky than the financial markets' view!

adonis10

princeofpounds wrote: »

Short answer is that no-one knows. If we did, we could predict future interest rates perfectly and become multi-millionaires.

Slightly longer answer is this; the market will typically price fixed rate financing to its best guess of what future interest rates will be on average. That average word is important, because if for example you have a 3 year fix at 5%, and variable rates are at 2%, it actually means the predicted rates path will be something more like 2,5,8 than 2,5,5.

The maths is a little more complicated than that, but close enough. You can't rely on the exact numbers but worth understanding the principle.

Now, having said that, fixed rate mortgages will always be priced slightly more expensive vs current expectations than sitting on a variable throughout the period, because you are taking less risk.

So I would urge you to consider your personal situation first and then find the best-priced product that is right for you. If you are on the edge financially then it can be worth fixing despite the cost, because the downside if things go wrong on a variable is more severe than simply having less money to spend at the end of the month. But if you find repayments comfortable even at much higher rates then having a variable could be best.

Also, maybe you have a strong view on interest rates that is more accurate/lucky than the financial markets' view!

Thanks. No, I don't have such knowledge unfortunately! Only use started thinking about buying so very inexperienced.

I don't have many outgoings and no family xommitments so from my 1450 take home pay, I've probably got 900-950 spare each month for mortgage and savings. I don't really want to go
Higher than 420 at the mo (looking at 50% loan on 160-170k property) as I don't want to be simply living to pay a massive mortgage and not living. I guess fixed is probably better so then I know exactly what I can save each month. Also unsure what term to go for. Tempting to do 15 years but tjats a decent amount less each month for 15 of my younger years, probably makes sense to go 20-25 as in 15 years there is more chance
I'll
Be earning more and have more disposable anyway.

G_M

Most peope go for a 25 year term.

But it is perfectly possible to then pay it off earlier eg if you win the premium bonds or just get a pay rise.

Again - if you have 'Fixed' your rate for, say 3 years, usually there is a penalty or limit to making extra payments, but at the end of the 3 years there is nothing to stop you making a one-off payment (£1000, £20,000).

Smilarly on variable mortgages (and some fixed - read the conditions!) you can make regular over-payments. So again, if your salary goes up, you just increase your monthly payments. This means you pay off your mortgage earlier (15 years?) and thereby reduce the total interest charged and thus the cost to you.

JEichlerSummers

I go for a fixed. While the economy is in a bad state, food price inflation is a real medium term risk (drought in America). The higher the price of food, the higher inflation, the more pressure there will be to up interest rates.

Fire_Fox

http://forums.moneysavingexpert.com/forumdisplay.php?f=15

Kynthia

Variable is usually a lower interest rate but you have no certainty and the repayments can change. You benefit when rates are low but risk your repayments increasing greatly should rates rise. If your repayments are easily affordable and you could afford to pay more or you know your income is likely to rise, you might choose to risk a variable rate.

Fixed means you know what your repayments are and it's low risk. You borrow at a repayment amount you can afford and you know that even if rates rise, during the fixed term you will continue to be able to afford it. If you know your income is unlikely to rise in the next few years or you are borrowing near your max then fixed is best.