Happy Presidents Day to those of you reading in the U.S. Before we get started today, please read my disclaimer.
The mortgage industry is bustling to accommodate borrowers seeking to lock-in the lowest interest rates they have ever seen. Fixed interest rates are once again near all-time lows, so a vast majority of home borrowers now embrace attractive, fixed rate loan options. Though it makes sense in many cases, a fixed rate mortgage is not your only option. Some borrowers are finding a better fit with variable rate products, so it pays to evaluate your mortgage options before committing to a standard fixed-rate payback schedule.
Flexible Borrowing Options Serve Diverse Needs
For a large share of home buyers, the consistency and affordability of fixed-rate loan products makes them comfortable choices. Fixed-rates allow borrowers to anticipate payments and make sound budgeting decisions over time. To many home buyers, steady payments are the best way to manage mortgage payback.
On the other hand, some borrowers have greater tolerance for variable payments, which rise and fall according to the Bank of England Base Rate. While fixed rate loans protect borrowers from interest rate spikes adding to the cost of payback, fixed rates can also cancel-out potential savings variable rate borrowers gain when rates stay low. Your best mortgage match depends upon your personal circumstances. As you sort through options, you’ll want to consider your long and short-term financial goals as well as your sensitivity to fluctuating payments.
Current Lending Trends
A sampling of current fixed rate options shows rates near historic lows. Depending upon your down payment, rates are available as low as two and one-half per cent for many borrowers. Among five-year fixed rate loans, those buyers with 40 per cent down, for example, may qualify for an HSBC loan with a prevailing rate of 2.48 per cent. With 25 per cent down, qualified borrowers take advantage of a 2.94 per cent interest rate from Norwich and Peterborough. Even a 15 per cent down payment unlocks an attractive five-year, 3.64 per cent deal through Chelsea BS.
During the fourth quarter of 2014, nearly 85pc of mortgages initiated by lenders were fixed-rate loans. The trend accounts for new buyers, but it also reflects high volume remortgaging by property owners seeking relief from high interest rates on their home loans. Locking-in at comparatively low rates has helped many families correct household budgets, but there is another school of thought operating in the mortgage industry too, drawing some borrowers to variable rate alternatives.
Advantages for Some
Fixed rate mortgages hedge against interest rate increases brought on by changes to the Bank of England Base Rate. The interest rate offered on fixed loans is a prediction of which way economic trends will unfold. Variable rate loans, on the other hand, are directly tied to real-time changes in financial markets, so interest paid by borrowers reflects prevailing conditions, rather than future forecasts. As a result, those willing to bear the potential for variable rate increases also enjoy savings when variable rates remain low. One aggressive variable rate promotion offered by HSBC, for example, offers a .99pc interest rate for borrowers with 40pc equity or deposit. The “discounted” variable rate reverts to “standard” variable rate after two years, and requires a £1,499 fee from borrowers. Of course the loan is variable, so the ultra-low rate is not guaranteed. To certain borrowers, however, it is well worth a go.
Anecdotal reports indicate wealthy clients are choosing variable rate loans more often than less-affluent borrowers. For starters, economists are predicting interest rates will not be adjusted in the short term, opening the door to savings for variable rate borrowers. Of course this can change rapidly, but wealthy borrowers are in a better position to rebound from financial missteps. Their strong credit also allows them to move freely between variable and fixed rate mortgages, so rich borrowers can quickly change their approach as the lending market shifts. In fact, it is the flexible nature of variable rate loans that appeals to some wealthy borrowers, enabling them to pay ahead on loans without incurring early repayment penalties.
Whether you are remortgaging, or financing a new purchase, flexible mortgage options are available to meet your financial goals. Although fixed rate mortgages present attractive funding sources, variable rate loans are an even better fit from some borrowers. Before you lock-in your next loan agreement, investigate various mortgage alternatives for unique benefits each approach brings to your situation.