Variable or Fixed Rate Mortgage

by Mark Johnston

Recently the Bank of England maintained the startling base rate of 0.5 per cent.  This should come as no surprise to the readers of  With the struggling pound and the weak progress of the pound against other currencies, the Monetary Policy Committee has decreed that the base rate should not change.  This marks the 25th month running that the committee has decided against a change.  Millions of borrowers will be effected when the rates do change and will have to decide if switching is the right thing to do.

What do the numbers reveal?  If you took out a £160,000 mortgage before the recession in 2007 and you were on a tracker mortgage.  Lets say base rate was 2.75 per cent and the tracker mortgage you took out, tracked the base rate plus 0.1 per cent, you would have been paying in the region of £750 per month in mortgage and interest payments.

Now, however, since the Bank of England Monetary Control Committee have maintained interest rates at 0.5 per cent, every person on a tracker rate is a little better off.

If we use the same metrics as before, a £160,000 mortgage over 25 years with a tracker mortgage of 0.1 per cent above base rate.  This would mean that a provision of £575 would need to be made every month to cover the mortgage repayments, nearly a £200 difference.  This extra money can be spent on other bills, loans or over payments on the mortgage.

According to figures within the mortgage industry, about 69% of people are on variable rate mortgages.  This means that many people are enjoying low interest rates and low monthly repayments on their mortgage.  This may be short lived when the base rate is increased.

“The expectation was that they were going to go up, perhaps next month, but inflation has fallen off slightly, so we’re now expecting a rise towards the end of the summer,” said Melanie Bien from Private Finance.  She went on to say “And we’re also not expecting rates to shoot up to 5%, but to start rising much more slowly,”.  Safely predicting a 2 per cent rise by the end of this year and a base rate of about 3 per cent into next year. 

The fixed rate mortgages are just that, they are fixed and will not fluctuate with the highs and lows associated with the Bank of England base rate and the whims of the Monetary Policy Committee.  The fixed rate mortgage gives you some peace of mind, in that you know what your mortgage outgoings will be today, tomorrow, next month and next year.  This assurance does come at a price and the fixed rate options are often a bit more costly in fees and administration charges.

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