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Fixed or variable interest rate in the UK – pros and cons

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Are you applying for a mortgage for your dream home in the UK? Not sure what interest rate will be appropriate?  Check whether it is better to choose a fixed or variable interest rate in the UK!  In the following entry we suggest which interest rate to choose. You will learn the pros and cons of any mortgage interest rate in the UK.

What interest rate to choose? Fixed or variable?
What interest rate to choose? Fixed or variable?

Mortgage interest rate in the UK – types of interest rate

When deciding to take out a mortgage at any bank in the UK, you have several options to choose from. You can opt for a loan with a fixed or variable interest rate. It is worth emphasizing that the choice of interest rate should be very well thought out. This is due to the fact that when borrowing a large amount, choosing the right type of mortgage has a significant impact on the difference in monthly payments. In other words, the type of interest rate determines the size of instalments, and thus how much money will remain in your pocket. Therefore, every borrower taking out a loan in pounds should analyse in advance how much the repayments will be in the short and long term. Therefore, see below how a variable interest rate differs from a fixed interest rate!

Fixed-Rate Mortgage

A Fixed-Rate Mortgage guarantees that the mortgage instalment will be fixed and will not change for a certain period of time, which was set in the mortgage offer. This is a proposal for people who are looking for a safe solution. A mortgage with a fixed interest rate guarantees the same instalment size each month, which is why you are able to plan your expenses. The fixed interest rate period lasts for 2, 3, 5 or 10 years. Usually in most banks it is 2 or 5 years. After this period, there is a change to the mortgage on variable interest rate (SVR), which you can read about below.

Standard Variable Rate

It is different in the case of mortgage loans with a variable interest rate (Standard Variable Rate – SVR). The interest rate may vary depending on the specific bank, because it is set individually by the lender. In this case, the monthly instalment during loan repayment is variable and may depend on several factors, which in turn affect the size of the monthly instalment.  Firstly, it changes with the reduction or increase in the base interest rates by the Bank of England. In addition, in the economic situation in the country, inflation,  SONIA (Sterling Overnight Index Average) previously LIBOR (London Interbank Offered Rate), as well as any political changes in the UK affect the amount of the mortgage instalment with a variable rate. It is worth emphasizing that the choice of this interest rate can be beneficial, especially when there are low interest rates, but it is still more risky.

What mortgage rate in the UK to choose?

Surely you are wondering what to choose: fixed or variable mortgage rate in the UK? It is worth bearing in mind that the choice of a specific solution depends on the size of the loan taken, the bank’s offer, the person deciding on the loan, as well as the number of installments, i.e. the time in which you want to pay off the mortgage. The choice of a given type of interest rate should be carefully thought out on the basis of the current situation in the UK, forecasts predicted for the next years, as well as the interest rate itself.

Undoubtedly, Fixed-Rate Mortgages is recommended for people who value security, and thus fixed amounts of monthly loan installments. Due to the fact that the fixed interest rate gives security, a higher percentage applies in this case. In turn, the Variable Rate Standard is recommended for borrowers who take into account the risk and are prepared for variable monthly repayment amounts. Thanks to this, they can save on interest paid with the repayment of the loan. What’s more, it is worth deciding on this type when you have savings that, in the event of an increase in fees, will guarantee you repayment of the installment.

If you have doubts about choosing the right interest rate, use the help of Extend Finance. We are independent Whole of Market mortgage brokers.  We have already helped many clients in choosing the right mortgage and interest rate.

Interest rate with a fixed or variable rate – pros and cons

A loan with a fixed and variable interest rate have its advantages and disadvantages. For some borrowers, selected aspects may be crucial when deciding on a specific type of interest rate. Therefore, below we have prepared for you a list of pros and cons of each solution.

Fixed interest rate

Pros:

  • the size of the loan installment is the same every month, thus guaranteeing security,
  • the ability to plan a monthly budget for household-related fees,
  • the installment does not increase with the increase in interest rates resulting from the change in interest rates by the Bank of England,
  • you can usually choose a short- or long-term contract.

Cons:

  • the fixed interest rate is greater than the variable interest rate,
  • usually, the installment is higher in the case of a loan with a fixed interest rate,
  • in the event of an interest rate cut by the BoE, you will not take advantage of the opportunity to reduce your installment and thus save money,
  • if you want to pay off the mortgage quickly, there is usually an additional fee (Early Repayment Charge).

Variable interest rate

Pros

  • if interest rates fall, the monthly loan installment also falls,
  • the variable interest rate is lower than the fixed interest rate,

Cons

  • the amount of the loan installment depends on the SVR interest rate, therefore, in the case of interest rate increases by the BoE, the monthly loan installment increases,
  • a loan with a variable interest rate carries the risk of increasing the monthly cost of the loan, therefore it is worth having savings when deciding on this solution.

Summary

  • You can distinguish a mortgage loan with a variable and fixed interest rate.
  • The fixed interest rate ensures the same amount of monthly loan installments for the time specified in the loan agreement.
  • The variable interest rate changes every month. It may fall or rise depending on the size of the interest rates set by the Bank of England.
  • The fixed-rate mortgage is greater than the Standard Variable Rate.
  • When taking a mortgage in the UK, it is worth analyzing several factors in advance, m.in interest rates, the economic situation in England or forecasts for the coming years.

FAQ

1. What is the difference between a fixed interest rate and a variable interest rate?

If you choose a mortgage with a fixed interest rate, you can be sure that the monthly installment will be the same for the duration that was specified in the contract. The variable interest rate depends on several factors, m.in interest rates determined by the BoE, therefore the monthly loan installment is variable.

2. What is the mortgage rate in the UK?

The mortgage interest rate is set by each bank individually. The interest rate includes the reference rate set by the Bank of England and the bank’s margin. On that basis the interest rate is determined on an annual basis.

3. What type of mortgage interest rate in the UK to choose in 2022?

The type of interest rate on the loan depends on several issues. In the case of a fixed interest rate, you can be sure that your monthly installments will be unchanged. On the other hand, in the case of variable interest rates, monthly contributions will change as the interest rate set by the Bank of England fluctuates. The choice of a given interest rate should be analyzed based on the number of installments, loan size, bank offer or individual preferences.

I encourage you to contact Extend Finance if you need a mortgage advisor who will check the available options that are on the market and advise which one to choose.

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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

Extend Finance nor The Right Mortgage Limited can’t provide advice regarding Personal Pensions, Pension planning or investment planning advice. You must seek independent financial advice from a suitably qualified professional financial adviser who may charge you for advice.

Wills, Will writing, Trusts and Trust planning are not regulated by the Financial Conduct Authority.

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