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Choosing A Mortgage

The following is a guest post. If interested in submitting a guest post, please read my
guest posting policy and then contact me.


When it comes to choosing a mortgage, there are essentially two types to choose between: fixed rate, and variable rate. For great deals on fixed rate and variable rate mortgages, visit santander-products.co.uk.

With a fixed rate mortgage, the interest rate stays constant for a certain length of time, such as two, three, or five years. After the fixed rate period ends, you will move onto the lender’s standard variable rate. While a fixed rate does protect you against interest rate increases, if the interest rate drops then you could end up paying over the odds. They are best suited to people who need to budget carefully, or those who do not want to risk having their mortgage payments raised unexpectedly.

When a fixed rate mortgage switches to a variable rate, it may be a good idea to switch to a different mortgage provider, as the standard variable rate is rarely the best deal available at that time. Fixed rate mortgages tie you in for the length of the fixed rate period, so if you want to switch providers or pay off your mortgage during this time, you will have to pay an early redemption charge. This is why you may not want to be tied in for more than a few years, even though longer fixed rate periods are often available.

With a variable rate mortgage, the interest payments can rise or fall in line with changes to the Bank of England base rate. There are two basic types of variable rate mortgages: tracker and discount. With a tracker, the mortgage rate is set at a fixed margin to the base rate, so if you had a tracker that was pegged at 2% above the base rate, and the base rate was 0.7%, you would pay 2.7% interest.

With a discount mortgage, the rate you pay is linked to the lender’s standard variable rate (SVR). While these tend to follow the movements of the base rate, they do not have to. These types often start out cheaper, but if the base rate falls and the lender does not drop its SVR, then you might have been better off with a tracker.

The main advantage of a variable rate mortgage is that you can benefit if interest rates fall, rather than being tied into a higher rate for a certain length of time. However, if rates rise, they provide no protection against rising payments, which makes them more risky if you are on a tight budget. You can test this by using a mortgage calculator, such as the one available at the BBC website, and trying out various scenarios.

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Choosing A Mortgage

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August 7, 2012 by Adam 24 Comments

Filed Under: Financial Advice Tagged With: mortgage

Comments

  1. Brian says

    August 7, 2012 at 6:35 am

    Another advantage of variable rate mortgages is that the interest rate is lower than a five year fixed rate. There is less risk and variability with a fixed rate mortgage, but they have been generally shown to cost more money over time. Our mortgage is currently prime – 0.85%, resulting in a 2.15% mortgage rate. Especially in times of economic stagnation, when rates are unlikely to rise, variable is the way to go.

    Reply
    • Jeremy says

      August 7, 2012 at 9:36 am

      The problem is that it can be tough to predict what will happen with the rates in the long term. Some people would just rather have that peace of mind rather than be worried about their rates going up in the future. I’m not really sure which route I would go when I get a mortgage.

      Reply
  2. K @ Get Worth says

    August 7, 2012 at 6:42 am

    I’m used to fixed rate meaning a constant rate for the length of the loan, 10, 15, 30 years and adjustable rate meaning fixed for 1, 3, 5 and then adjustable after that. Interesting differences just a few miles to the north. Are there fixed rate 30 year mortgages available, I didn’t see any mentioned?

    Reply
    • Jeremy says

      August 7, 2012 at 9:38 am

      The author of this post is actually in the UK. So they probably have a different mortgage setup too. Honestly I’m not sure about what is available here in Canada. Since I don’t have a mortgage, I’ve never personally looked into the details much.

      Reply
      • K @ Get Worth says

        August 7, 2012 at 12:58 pm

        Ah, I missed the UK in the url. I just saw a comment on Get Rich Slowly that Canada doesn’t allow 30 year amortization anymore, only 25 or less.

        Reply
        • Jeremy says

          August 9, 2012 at 10:38 pm

          Yeah it kinda sucks for people like me who haven’t gotten their first mortgage yet, but at the same time I wouldn’t want to take so long to pay it off anyway. It just delays the point of when I’d feel secure taking on a mortgage.

          Reply
  3. Christopher @ This That and The MBA says

    August 7, 2012 at 10:02 am

    I have always been leary of a rate that changes. I like knowing what my payment will be years in advance. I could always refinance to a lower fixed rate but working in finance, risk is something that I like to avoid. Generally the variable rates are a little bit better than the fixed rates, I guess if you jump back and forth it might work to your advantage. But then you factor in all the costs of switching it might eliminate any gains. I wasnt aware of the 2 types of variable rates, pretty interesting.

    Reply
    • Jeremy says

      August 7, 2012 at 1:32 pm

      I would probably choose that security too. I don’t think a home is worth taking risks with. I’d hate to take on a variable mortgage only to later be in over my head. Sure a variable rate might be cheaper, but some things are just not worth risking. I guess it will depend on how secure I feel about my financial situation when I do get a mortgage.

      Reply
  4. Ornella @ Moneylicious says

    August 7, 2012 at 10:21 am

    It’s nice to say a refreshing post about your mortgage options. I find too many people are stuck on fixed rates. At times, a variable option may be best suited for your financial circumstance. As we know, personal finance is PERSONAL more than it is finance.

    Reply
    • Jeremy says

      August 7, 2012 at 1:39 pm

      If you do have the extra financial breathing room, now might be the best time to get a variable rate mortgage. You just don’t want to take on a variable rate when you are in a position where a rate increase would seriously affect your finances.

      Reply
  5. femmefrugality says

    August 7, 2012 at 10:53 am

    The differences across the pond are interesting. I’d be more interested in a fixed rate I think. I’m not a risk taker.

    Reply
    • Jeremy says

      August 7, 2012 at 1:45 pm

      Totally understandable. We don’t know what the future holds. Sometimes it is worth locking in your interest rate.

      Reply
  6. Jacob @ iheartbudgets says

    August 7, 2012 at 1:17 pm

    I almost wish I went with variable now. I couldn’t predict the markets, and I bought in 2010 when everybody thought we had “bottomed out”. Oh well. Fixed gives me more piece of mind, though possibly costing me more in the short term. I think I’ll fix that problem by paying it off as fast as possible. No mortgage really is the best rate 🙂

    Reply
    • Jeremy says

      August 7, 2012 at 3:50 pm

      I think with your financial situation it was a good decision to play it safe. With money already being tight, who wants to worry about things getting even tighter. A variable rate really can be a gamble.

      Reply
  7. DC @ Young Adult Money says

    August 7, 2012 at 3:11 pm

    Yikes, I don’t know who would want to go with a variable rate mortgage today. They are artificially low right now and won’t stay there forever. Lock in!

    Reply
    • Jeremy says

      August 7, 2012 at 3:52 pm

      I guess some people don’t really think things through. They see low rates today and they think they can get that rate or lower long term by going with variable. Time will tell whether it was the right decision or not, but it seems unlikely that rates will stay low for too long.

      Reply
  8. mycancukbuck says

    August 7, 2012 at 5:32 pm

    I really hope that sign isn’t real! 🙂 We have variable and fixed here – I’m a worrier, so I’ve gone only for fixed. There’s also open and closed – not quite so sure what those mean. With so many options, it pays to do your homework!

    Reply
    • Jeremy says

      August 8, 2012 at 10:02 am

      I think the sign is pretty legit. It’s a pretty funny multi-purpose business though. For someone who’s a worrier, the last thing you want to worry about is drastically increased mortgage payments.

      Reply
  9. Justin @ The Family Finances says

    August 7, 2012 at 7:05 pm

    With rates this low, I think a fixed rate mortgage is the way to go. When you can get a fixed rate mortgage for less than 4% and lock that in for 30 years, why would you go with a variable rate mortgage?

    Reply
    • Jeremy says

      August 8, 2012 at 10:04 am

      Exactly. I don’t know if people are just hoping that the mortgage rates drop even lower. I guess you do pay a little extra to lock in a rate long term, but we can safely assume rates will go back up eventually.

      Reply
  10. Edward Antrobus says

    August 7, 2012 at 7:39 pm

    I would have thought that during a period of low rates, a variable rate mortgage would be a BAD idea. After all, rates certainly aren’t going to go appreciably DOWN from where they are now! Up is a much more likely direction. Over 15+ years, I would think that the rate on a variable loan would increase well beyond the initially higher rate charged on a fixed rate mortgage.

    Reply
    • Jeremy says

      August 8, 2012 at 10:05 am

      That’s my thinking too Ed. Rates can’t stay low forever. So why gamble on how much those rates are going to go up down the road. They may eventually rise high enough that you just wish you had locked in a lower rate back when you could’ve.

      Reply
  11. Savvy Scot says

    August 8, 2012 at 5:10 am

    We have a 3 year fixed rate mortgage. As soon as we have finished paying off our credit cards (interest free of course) we will be making overpayments. It is crazy the number of years a small increase can knock-off your total!

    Reply
    • Jeremy says

      August 8, 2012 at 10:07 am

      It’s too bad more people don’t think that way. They just see a bit overall mortgage total and have little motivation to put extra money into it. Putting in overpayments early on can help out a lot in the long run though.

      Reply

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