Fixed rate vs. Variable Mortgages| Buying a Home in West Lothian

Published: 27/06/2023

Mortgages are a major priority for many of our clients looking to buy homes in West Lothian in 2023. The UK interest rate had been below 1% for over a decade, but towards the end of 2022 it skyrocketed to over 3%. It is still rising today with the Bank of England announcing another increase to the bank rate in May 2023 when it rose to 4.5%. With the fluctuations in interest rates it has led many to ask the question: should I opt for a fixed rate or variable mortgage?
In this article we’ll be going over what exactly fixed rate and variable mortgages are, and the pros and cons of each.

What is a Fixed Rate Mortgage?

A fixed rate mortgage is a type of loan people can take out when purchasing a home which will have a constant, consistent interest rate throughout the repayment period. For borrowers, this means monthly mortgage payments will be the same throughout the term of the loan, providing predictability and stability.

Advantages of Fixed Rate Mortgages

The main advantage of a fixed-rate mortgage is that it offers borrowers protection against rising interest rates. This has meant fixed rate mortgages have been by far the most popular type of mortgage in the UK in recent times. It provides borrowers with peace of mind and the ability to plan, knowing what their mortgage payments will be far in advance without worrying about changes in the economy. This can be particularly beneficial in times of economic uncertainty or when interest rates are expected to rise.
Another advantage of a fixed-rate mortgage is that it simplifies financial planning and makes it easier to compare different mortgage offers. Since the interest rate remains constant, borrowers can easily compare the total cost of different loans and select the option that best suits their financial needs.

Who Are Fixed Rate Mortgages For?

Fixed rate mortgages are popular among homeowners who prefer a stable and consistent mortgage payment. With a fixed monthly payment, borrowers can budget more effectively as they know exactly how much they need to allocate for their mortgage each month. This predictability allows homeowners to plan for other financial goals or expenses without worrying about potential increases in their mortgage payment.

Disadvantages of Fixed Rate Mortgages

There are some reasons to be wary of fixed rate mortgages which mean they may not be the best option for you.
In 2023 we have seen interest rates fall compared to the heights of 2023. This means if someone agreed to a fixed rate mortgage a few months ago they may be paying a higher interest rate than is necessary compared to a variable mortgage. So, if interest rates rapidly rise it may be worth considering a variable mortgage instead of agreeing to a high interest rate which is likely to fall soon.

What is a Variable Mortgage?

A variable mortgage is a loan taken out by someone buying a home where the interest rate can vary throughout the repayment period. This contrasts with fixed rate mortgages which have a constant interest rate for the whole duration of the mortgage’s repayment.

Advantages of Variable Mortgages

Variable mortgages often have a lower interest rate at the beginning of the loan in comparison to fixed rate mortgages. For borrowers on a tight budget, or someone looking to sell the property soon, the lower payments offer obvious advantages.
With interest rates fluctuating, borrowers with a variable mortgage can really take advantage of falling interest rates. When interest rates fall, the monthly mortgage payments will also be less as a result. For example, someone on a variable mortgage taken out when interest rates were at 6% in 2023 will be paying less than that today when the rates are lower.

Disadvantages of Variable Mortgages

The key drawback of variable mortgages can be summed up with one word: risk.
Given the fluctuations and unpredictability of the economy, it is impossible to know what interest rates will look like in the future with any level of great certainty. So, if interest rates increase, borrowers on variable mortgages may pay more in their monthly payments than if they had opted for a fixed rate mortgage.
For people looking to plan their finances for the future, or trying to provide a stable environment for their family, this will be an unattractive prospect. Higher monthly payments can strain budgets and lead to added stress caused by uncertainty.

Our Advice

We would strongly suggest talking to a mortgage professional about what type of mortgage is best for you. Each case is unique, so what may be best for one person may not be the best for you.
As a rule, though, it’s worth remembering that fixed rate mortgages offer benefits in terms of peace of mind, stability, and planning for the future. Variable mortgages, on the other hand, are riskier but can result in lower monthly payments and greater savings. Given their lower initial payments, they can also be favourable for people on a tight budget or someone looking to sell in the near future – as long as they factor in the potential risks.