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Variable Rate Mortgages

The use of variable rate mortgages has increased and more and more people are using this strategy. This strategy, by its nature (variable), is about taking a risk that must be assumed but in recent years it has shown very good results.

Description

The interest rate on a variable rate mortgage changes with the base rate of the Bank of England. The lender does not give you a fixed rate but a discount off the basic rate. For this reason, variable rates are expressed as the base rate less a percentage.

Example: “if the rate is based on base rate minus 0.90% in this case, if the base rate is 6.00%, the customer will pay their mortgage rate of 5.10% (6.00 - 0.90%) for this period of time. Some time later if the base rate is 5.25% then the mortgage rate of the mortgage will be 4.35% (5.25% - 0.90%) for this period. The Bank of England sets the interest rate every month. That does not mean that the rate will change 12 times but its more a review and a decision of whether the rates need to change, and deciding on a new rate if the rates need to change.

Advantages Of Variable Rates Mortgages

Historically, this is a very good strategy, especially when rates are stable or decreasing. This strategy allows borrowers to:

  • Take advantage of rates that go down during the term of the mortgage.
  • Payments are usually lower.
  • Available from many lenders.

Disadvantages

  • Rates are variable, so they can ascend or descend (a risk factor).
  • Payments vary with interest rates.

When Using The Long-Term Strategy

It is clear that the variable rate is a good choice when the rates tend to go down or are stable. Since it is difficult to know for certain which way the rates are headed, if you take a variable rate mortgage, you will have to keep a close eye on the trend of interest rates every month.

All products offer a variable rate has also an option to convert the variable rate to a fixed rate. It is a fairly easy process: you call the lender and you tell it to convert your loan to a fixed rate.

Caution: Lenders Increase Rates When You Switch To Fixed Rates

If you see that the interest rates are rising and you wish to change your mortgage from a variable to a fixed, you need to take account of the fact that the fixed rate offered will usually be higher. When someone wishes to convert a mortgage from a variable rate to a fixed rate, lenders are usually known to increase the fixed rate offered to a borrower.

How To Stay Updated On The Movement Of The Base Rate?

Due to the fact that your mortgage rate varies with the base rate, it is important to keep an eye on the base rate. Keep note of the following points to track the interest rates:

First, the base rate may change as much as 12 times a year. When the Bank of England adjusts its policy rate this news is usually disseminated to all mass media (newspapers, radio and television). Your mortgage broker will also have first hand knowledge of the interest rates so keep in touch with your broker and keep an eye on the media. The interest rate announcement is usually made on the first Thursday of every month by the Bank of England.

Consider A Variable Rate With Ceiling

Some lenders offer variable rate with a ceiling. That is to say that if variable rates rise above the ceiling rate, your mortgage will be adjusted so that your rate is equal to the ceiling. Your maximum rate therefore, is the maximum rate for your mortgage.

Conclusion

The strategy of variable rate is often an option that must be examined carefully. Several thousands of pounds can be saved as a result of the right choice. Consider the following 2 tips before choosing your variable rate mortgage:

  1. Choose a variable mortgage with the right lender. There are so many variations in the variables rate mortgages.
  2. Stay up to date on interest rates or make sure your broker is in contact with you to advise you.
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