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  • How to Pick Between Fixed and Variable Interest

    When you are choosing a loan, you will notice that some loans have a fixed interest rate and some have a variable rate. It can be rather confusing trying to work out which will be the best for you to take out. It is worth understanding the difference so that you can get a better idea of which will suit you. Some people choose to use a financial advisor to explain it to them and help them to make the right decision, especially if they suffer from poor or bad credit. However, if you cannot afford one then you might be doing this yourself. Finding out more about the different loan types us a good place to start.

    Fixed Rate

    With a fixed rate loan you will pay the same amount of interest every month. This means that if the base rate changes you will not have to pay a different amount. This can protect you against rate rises and will mean that there is no uncertainty as to how much you will need to repay each month. People who feel they will just about manage to cover their repayments will enjoy the security that this loan provides as they will know that their payments cannot go up.

    However, you may find that the fixed rate will be higher than a variable rate. This means that you could end up paying more if you choose a fixed rate. If the base rate drops, you will not be able to take advantage of it if you have a fixed rate. You may also be tied into the loan so that you cannot switch to a lender which can provide you with a better rate. This can mean that it will be expensive for you, but it will depend on what the base rates do during the course of the loan.

    Variable Rate

    A variable rate can be changed by the lender at any time. They will often put the rate up when the base rate increases, but they may not reduce it if the base rate goes down. There is therefore uncertainty attached with going with a variable rate and this is not something that everyone is prepared for. They may worry about the prospect of their rates going up and so may be more prepared to go with a fixed rate. However, there may be others that would prefer the flexibility of being able to switch lenders and for their rate to potentially fall when the base rate falls. They may be careful in choosing a lender which has no or a very small fee for moving to a new lender and will feel secure that if the rates go too high, they will just be able to switch to someone who is cheaper.

    How to Choose

    It is important to think about your own personal situation when considering which of these will suit you the best. There are different reasons for choosing different options and you need to think about which will suit you the best. Try not to just focus on your current financial situation though. Although it is very important that you are able to manage the repayments now, you must also think about how long the repayment period is and how you will manage for the whole of that period, not just in the next few months. Consider whether there are likely to be any changes in your financial situation and how that might impact your decision. It is not easy to predict the future, whether you are trying to think about what might happen to you or what might happen to interest rates. However, you might be able to contemplate a few scenarios and think about how you would cope in those. Because it is really important to make sure that you repay the loan on time, it is key to make sure that you are confident you will be able to do this. Not borrowing more than you need is a good way to start by protecting yourself against the costs of borrowing too much. It is also important to check how much the repayments will be and whether you will be able to afford these. If you go for a variable rate, they may go up and so you need to be confident that not only can you afford them now, but if they go up. Consider how much they might go up and whether this amount will still be affordable for you.

    It is worth remembering that while you are choosing a loan type you will also need to think about which lender you need to go with. They will vary a lot in what they offer and so you may prefer what one offers in their fixed rate but what another offers in their variable rate. Try to keep open minded, do lots of research and pick what seems to be the best for you.

  • How to Choose the Best Mortgage

    There are many mortgages available to choose from and it can be tricky to know which to go for and how to choose. Even if you have had a mortgage in the past this can be a daunting task. Choosing a mortgage is a big decision as you are borrowing a lot of money and sometimes it is not easy or free to switch lenders. Therefore, it is important to pick the right one for you. It is worth using a financial advisor if you can afford it and do not want to spend the time researching yourself. However, if you do decide to research yourself, you need to understand the difference between different types of mortgages, so that you are able to pick the one that will suit you the best.

    Fixed rate mortgage

    With a fixed rate mortgage you will have the interest rate fixed for a certain period of time. This is unlikely to be for the full term of the mortgage but perhaps for between two and five years. This will protect you against any rate rises as the rate will remain the same and will mean that you will know exactly what you will be repaying each month. It can particularly suit those people who feel that they will struggle if the amount that they need to pay will go up. It will also be useful if you feel that rates will rise above that fixed rate amount. No one can really predict rate rises though so it can be hard to know what might happen in the future.

    A fixed rate mortgage can be a problem because you will not be able to take advantage of rate reductions. This means that you could be paying significantly more than necessary, particularly if rate reductions happen just after you take out the mortgage and your fixed rate period is a long time. You may feel that this will be find as you can just switch to a different mortgage. Unfortunately, fixed rate mortgages tend to tie you in to a certain time period. So, you are not allowed to switch during the fixed rate period and possibly even after that. You may be able to move if you pay for it and it has been known for borrowers to have charges of thousands of pounds even to move from a fixed to variable rate mortgage with the same provider. You therefore need to be very careful that you are sure this is the right option for you and that you are completely aware of any costs of moving to a different mortgage or different lender.

    Variable rate mortgage

    A variable rate mortgage is riskier, in that if the interest rates go up you will pay more. Usually a lender will increase their rates when the base rate goes up, but with a variable rate they are entitled to change it whenever they like. This means they can put it up or down at any time and this could be costly for you and may make it difficult for you to find the extra money to repay it. Of course, if rates go down you will benefit from that and this means that it could be a cheaper way to borrow compared with a fixed rate. Although, if rates go up, you may find that it is dearer than a fixed rate. Again, which one you choose, may depend on how well you think you could manage if the rates went up and whether you think there is a risk that rates will increase or if you think that they will decrease.

    Tracker mortgage

    A tracker mortgage will track the base rate. This means that you will pay a certain percentage or lump sum to the lender plus the base rate. If a change is made to the base rate, you will automatically start paying at that altered level. This means that if rates fall, you will immediately start paying at the lower rate. Sometimes, when you are on a variable rate, the lender will not reduce the rates when the base rate falls. They are under no obligation to do this and so you could miss out on the cheaper rates.  Of course, if the rates rise then the opposite will happen and rates will go up right away. This is likely to happen anyway with a variable rate account anyway as lenders will want to start making more money as quickly as possible.

     Some people prefer this type of account compared to a variable account because they are able to take advantage of rate reductions right away. If the amount the lender charges on top of the base rate is very small, this can make it a lot cheaper than a variable rate mortgage as well. It is worth thinking about whether it is right for you. It has the same disadvantages as a variable rate in that you will not know how much you are paying each month and the same advantage that the rate can drop, but the lender has to drop the rate if the base rate falls if you have a tracker account but with a normal variable account they do not have to do this.