What is best - fixed or variable rate loans? Should you care?
This article explains all.
Thought Fixed Rate Will Give You a Respite from the Perils of
Variable Rates! Think Again
Slight increases in the interest rates raise your hackles.
Tension grips your mind as to how you are going to make the extra payment.
Preparations begin right then to provide for the repayment, though it requires a
huge cut in the monthly expenses.
Cautious is what describes your state. A fixed rate mortgage
will be the solution to the stress that they are facing as to the repayment.
Fixed rate mortgage, as the name suggests limits the interest rate to a
particular level. The borrower is protected against any increases in the
interest rate. He keeps on making a lower repayment, when his contemporaries who
did not have a fixed rate to protect them, pay a higher interest.
Apart from the savings that a fixed rate results into, it also has an added
advantage. The borrower is not required to make regular calculations considering
the newer rates. He keeps on paying the same monthly repayment that he paid at
This however is not free from any disadvantages. We deal with the
disadvantages of the fixed rate mortgages in the following paragraphs.
A borrower normally opts for a fixed rate mortgage to protect him/ her from
hikes in interest rates. But they fail to consider a situation when the interest
rates start falling. The entire statistics of the borrower fails and he feels
In such a scenario he is left with no options except to continue making the
repayments, or look for refinancing the mortgage through remortgage. Continuing
with the repayments will mean that the mortgagor pays higher than what he
Even remortgaging will not produce the desired results. The lenders accept to
remortgage the fixed rate mortgage only when they find it having some potential.
Also the borrower will have to accept the remortgage at the lenders terms. This
means that the borrower will have to face a loss in both the cases whether he
chooses to continue repaying or he goes for a remortgage.
The second drawback of a fixed rate mortgage is that the rate of interest is
not kept fixed for the entire period of repayment. The interest rate is fixed
for the initial few years. After that the borrower has to pay a repayment
according to the interest rate prevailing in the market.
Other alternative interest rates can be tried to get the optimum method of
charging interest. The other methods commonly utilized are as follows:
Variable interest rate
It is the vicissitudes presented by a variable rate that leads to people going
for a fixed rate mortgage. These are desirable till the interest rates are
falling. Once the interest rates start ascending they become a menace.
A capped rate combines the good points of both fixed rate and variable rate
mortgage. The interest rate is allowed to fall freely, but not allowed to rise
above a particular level. This means that the borrower is assured that he will
always pay a lower amount. But the period of capped rate is limited. The normal
period for which the rate is capped ranges from 1 to 5 years.
A discounted rate is a cut-off allowed by the lender during a small period. This
is normally allowed in case of first time buyer mortgages. The first time buyer
is not burdened with the excessive repayments from day one. The borrower can get
the mortgage refinanced after the completion of the discount period to avoid
paying higher rates.
While lenders assure that they will incorporate any changes in the interest rate
right from the time it is effected, they seldom do. This means that till your
lender incorporates the downfall in the interest rates, you have lost several
pounds. A tracker rate is linked directly to the base rate and helps to save in
case the interest rates fall.
Thus the next time you plan to take a mortgage, take stock of the various
interest options available. You dont have to stick to the variable interest
rate. Neither is fixed rate the only option available to you. Capped rate,
discounted rates and tracker rates can also be taken to suit the situation one
Andrew baker has done his masters in finance from CPIT. He is engaged in
providing free, professional, and independent advice to the residents of the
UK.He works for the personal loan web site ukfinanceworld for any type of
Uk secured loans and unsecured loan please visit
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