Five questions to ask about: Fixed rate mortgages

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The Independent Online

What is the difference between a fixed and variable rate mortgage?

With a fixed rate mortgage, you have the guarantee that your monthly repayments will not change for a set period of time – most commonly two, three or five years although other fixed terms are available.

If you choose a variable rate mortgage your repayments could change. There are two types: tracker mortgages are linked to the Bank of England base rate. Discounted mortgages are linked to the lender's standard variable rate (SVR). Changes to the SVR are at the lender's discretion.

What are the advantages of fixing your mortgage?

Knowing that your mortgage costs will not change makes them very attractive to those who need to budget carefully or who don't want to run the risk of higher monthly payments.

And the disadvantages?

The trade-off is the fact that you won't benefit if interest rates fall. When base rate was cut from 5.0% to 0.5% between October 2008 and March 2009, many of those with variable rate mortgages saw their monthly payments reduce by hundreds of pounds. But those with a fixed rate saw no benefit.

What else should I bear in mind?

Look at the fees. Arrange-ment fees can vary significantly and it may be worth paying a slightly higher rate in return for lower set-up costs. You need to work out the total cost, including fees, over the fixed term.

Is now a good time to fix?

The next move in interest rates will be upwards so fixed rates are proving increasingly popular. However, the cheapest two-year fixed rates are about one percentage point more expensive than the leading trackers.

Rising inflation could mean we see rates start to rise sooner rather than later, no one knows when base rate will start to increase or how far it will go up by. If you are prepared to gamble, a variable mortgage is worth considering.

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