Understanding variable rate

ivk

Just got a 5 year fix mortgage offer from a high street bank. The fixed rate is 5.5%, which is fine with me, but then they say the following variable rate would be 3.5% on top of the BoE rate to the end of the term, which doesn't feel a bargain exactly?

Now, I realised that I don't really understand how this is going to affect my options past the fixed period. I understand 3.5% plus the BoE rate is what I'm going to get if I do nothing and just let the fixed term end and stay with the lender. But may that extra of 3.5% also affect my future available deals somehow if I decide to switch to another lender after the fix or switch to another fixed product from the same lender?

user1977

I’m not sure why you think it would affect the rates which other lenders might offer you in the future? Bear in mind also that’s just the current rate - as the name suggests, it could be different by the time you get to the end of your current deal. You just shop around then.

ivk

user1977 said:

I’m not sure why you think it would affect the rates which other lenders might offer you in the future? Bear in mind also that’s just the current rate - as the name suggests, it could be different by the time you get to the end of your current deal. You just shop around then.

OK, that's reassuring, thanks.

To clarify, I'm not particularly worried about the variable/BoE part of the variable rate, but more about the lender's extra, that according to the papers I was given is very much fixed. They emphasise it that under no circumstances my variable rate can go below that extra and that it is to be applied to the whole rest of the mortgage term, which made me a bit cautious about what that might mean in practical terms once there's time to remortgage, because I wouldn't like to be affected in any way then by what the lender sees reasonable to offer now.

tooldle

if you remortgage, effectively the current mortgage is repaid and a new loan begins, with its own terms and conditions. 

MultiFuelBurner

The only thing you have to consider is being roughly in the same financial position you are now when your fix is cooking to an end. That way you can setup a remortgage with a another fix for say five years.

doodling

Hi,

The variable rate has no effect on what rate you might be offered at the end of your fixed deal.

To be blunt, mortgage lenders can set whatever they want as a variable rate.  The only thing that stops them charging ridiculous rates is the fact that if they did then all their customers on the variable rate would move to another lender.

As implied by the above, your protection against excessive variable rates is your ability to go elsewhere.  That means making sure that you have a clean credit history at the point that your fixed deal comes to an end.

user1977

ivk said:

user1977 said:

I’m not sure why you think it would affect the rates which other lenders might offer you in the future? Bear in mind also that’s just the current rate - as the name suggests, it could be different by the time you get to the end of your current deal. You just shop around then.

I'm not particularly worried about the variable/BoE part of the variable rate, but more about the lender's extra, that according to the papers I was given is very much fixed. They emphasise it that under no circumstances my variable rate can go below that extra and that it is to be applied to the whole rest of the mortgage term, which made me a bit cautious about what that might mean in practical terms once there's time to remortgage, because I wouldn't like to be affected in any way then by what the lender sees reasonable to offer now.

I'm still not quite sure where your confusion is coming from, but bear in mind that your mortgage term ends whenever you repay the loan (whether that's by remortgage, selling, or finding the money from elsewhere) - you don't carry on paying your original loan afterwards.

The illustration you're looking at assumes you go through the current fixed rate period, and then carry on with the same mortgage for the next 20 (?) years - even though that's very unlikely to be what will happen, and even if it is, the variable rate in 5-25 years time isn't going to remain at its current rate. But there are limits to how much crystal ball-gazing anybody can do.

Ksw3

That extra is essentially the minimum if you do nothing after 5 years (or whatever your term is). Most people don't do nothing, they remortgage or product transfer and then new terms, conditions and rates will apply. 

Gavin83

Out of interest if you come to the end of your fixed period and you're in negative equity can you actually renew/remortgage?

theartfullodger

Depends what BoE base rate does 

Genuine story  (apologies been told before ) in November 1979 under Thatcher's iron handbag BoE base rate hit 17%. Really.  Painful.  I was lucky, my building society only required 15% - had started about a year earlier at 10%.

Happy days....

user1977

Gavin83 said:

Out of interest if you come to the end of your fixed period and you're in negative equity can you actually renew/remortgage?

Maybe, maybe not. Depends whether the lender knows you're in negative equity. I expect it will be less of a concern if you're staying with your existing lender.

There might be other reasons why you can't remortgage. And no guarantee that there'll be any special deals for anyone in the future.