Benefits of variable rate mortgages for first time buyers
If you are a first time buyer, taking that first step onto the housing ladder can be daunting, especially if you carry out a search for mortgage products and just get hit with pages of percentages and terms that probably don’t make much sense. Therefore it is worth your while starting to prepare for your mortgage application sooner rather than later so you know what to expect from the process and so that you also have a good idea of what type of mortgage is likely to give you the best deal.
What is a variable rate mortgage?
In simple terms a variable rate mortgage is one in which the rate of interest that you pay can go up and down with changes in the overall interest rate. There are two main types of variable rate mortgage deals that you could potentially find as a first time buyer. The most common is the discounted variable rate mortgage, in which the interest rate that you pay on your mortgage amount will be a certain amount below your lender’s standard variable rate. The rarest type of mortgage available is a capped rated mortgage, which is very similar to a discounted rate variable mortgage, but one that also has a cap on the amount that you will pay, so should interest rates rise rapidly, you will not see the whole increase in your monthly payments.
The advantages of variable rate mortgages
The main advantage of a discounted variable rate mortgage is that you are guaranteed to be paying less than if your mortgage is subject to your lender’s standard variable interest rate. The discount periods can last anywhere between two and five years with longer discount periods often having larger discounts.
The disadvantages of variable rate mortgages
The biggest disadvantage of a variable rate mortgage is that it can go up as well as down. Therefore you should think about current interest rate and if there are any indications of whether it is going to increase or decrease over the coming months. If the interest rate is high then having a variable rate mortgage means that your payments will decrease as soon as the overall interest rate drops, whereas if you are on a fixed rate mortgage you will have to wait until the end of your fixed rate period to benefit from the drop in interest rates. If interest rates are particularly low a variable rate mortgage offers you less as an increase in interest rates will be passed onto you straight away, therefore increasing you mortgage payments before they would increase if you were on a fixed rate mortgage. The best way to assess the interest rate situation is usually to go through an independent mortgage broker.
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