Which type of mortgage is right for me?

29 April2009

If you`re looking for a mortgage and wondering which type of mortgage deal you should go for, there`s no point just thinking about the present. A mortgage is a long-term commitment, and you`ll need to think about what`s likely to happen to your finances - and the UK`s - for a number of years into the future.

After all, the cost of a mortgage depends largely (though not entirely) on the base rate, which is set by the Bank of England`s Monetary Policy Committee (MPC). Every month, the MPC meets to discuss the base rate and decide whether it should be raised, lowered or left alone.

Today, at the end of April 2009, the base rate stands at 0.5%, but what mortgage holders (and would-be mortgage holders) really want to know is where it`ll go next! Knowing that would make it much easier to make those vital mortgage decisions: Is it worth switching to a tracker mortgage? Should I get a fixed-rate mortgage now, or later, or never?

However, no-one knows where the base rate is heading, so here`s a brief look at what`s going on with the two basic kinds of mortgage deals: fixed-rate and variable.

Fixed-rate mortgages

If a mortgage starts with a fixed-rate period, the monthly cost won`t change until that period is over and the borrower reverts to the lender`s variable rate. If you want the certainty of knowing exactly what your monthly mortgage payments will be, a fixed-rate mortgage is probably for you.

Right now, new fixed-rate mortgage deals tend to be cheaper (i.e. they charge less interest) than we`ve seen in recent years. Many homebuyers are choosing a fixed-rate mortgage on the grounds that the base rate can`t go much lower - but there`s no real limit to how far up it could go!

Variable mortgages (including tracker mortgages)

Variable-rate mortgages can charge more or less as the base rate goes up and down, although only tracker mortgages (a kind of variable-rate deal) are guaranteed to do so. Variable mortgages can be good for people who want to benefit from a falling base rate - and who know they could afford the extra cost that a rising base rate would mean.

Like fixed-rate mortgages, variable-rate mortgages are also being offered at low rates right now, and many people are choosing variable deals that don`t come with an early repayment charge - in other words, mortgages that won`t charge extra if the mortgage holder switches to a different deal. This leaves them free to `jump` to a fixed-rate deal if it looks like the base rate is about to start climbing again.

It`s a strategy that could let them benefit from any further cuts to the base rate, but if you`re thinking of doing this, you`ll need to keep a close eye on what the experts are saying about the base rate, so you can make the move before the base rate starts going up, taking the cost of your variable deal - and any fixed-rate mortgage deal you might want to move to - up with it.

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Tags: mortgage, mortgages, fixed rate mortgage, variable rate mortgage, fixed rate, variable rate, types of mortgage, mortgage rates, types of mortgage rates

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