First lets define what a fixed rate and a standard variable rate are:
A fixed-rate mortgage (FRM), often referred to as a “vanilla wafer” mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”.
A Standard Variable Rate
A Standard Variable Rate is (rather obviously) a type of variable rate, this means your payments can go up or down according to changes in interest rates the rate is tracked at a set percentage above the Bank of England Base Rate.
It was reported by the FCA in 2018 that almost 2 million borrowers in the UK are currently on their lender’s Standard Variable Rate (SVR). This means that a vast amount of the population are not taking advantage of the best deals on the market.
When looking at mortgage rates you have 3 main choices:
• Fixed rate – does what it says on the tin…you have an agreed rate for an agreed period of time (typically 2 to 5 years)
• Variable rate – this is set by each lender and can be put up or down if they wish. This does not give security of monthly payments, but it does allow you to benefit if the rates ever dropped.
• Tracker – this type of rate can fluctuate depending on the market and the Bank of England Base Rate. There are no guarantees of this rate staying the same and it will be guided by what the economy is doing at that time.
In my opinion, Standard Variable Rates have 2 major downfalls:
Firstly they are always usually higher than the fixed rate alternative,
secondly, as stated above, they offer no security to the borrower as lenders can alter these rates at any given time.
Fixing your rate is the most beneficial option on the market at the moment and here is 4 reasons why:
• Certainty of payments – this is important as most people will spend what they earn each month, so having your mortgage fixed so that the repayments will not vary means that this payment can always be budgeted for.
• Protection from rate rises – once you are locked into a fixed deal, it means that if the rates on the market increase, yours will not.
• If you have no plans to move house – if you are going to be living in the same house for a long period of time, it means that you will be able to lock in a 5 year deal for example, and not have to think about remortgaging every 2 years.
• Fees – if you opt for a longer term fixed rate, it means you will avoid paying any fees associated with remortgaging frequently. Between paying broker fees, lender arrangement fees, valuation and legal fees – remortgaging can be a costly process if you aren’t smart about it.
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