Choice between mortgage types depends on needs, variable factors

Choosing between a fixed-rate mortgage and a mortgage that charges the lender’s standard variable rate could depend very much on what the individual borrower needs from the mortgage. On one hand, with a fixed-rate mortgage, the borrower knows exactly what his or her repayment will be for the life of the loan. In contrast, variable rates…well, they vary.

According to data from online mortgage lender Mform.co.uk, major mortgage lenders typically charge about 2 percent above the Bank of England’s base rate. With several interest rate hikes issued by the Bank recently, that means that rates on variable loans have also gone up. Those increases, says Mform, have cost those with standard variable rate mortgages around £750 per year in higher payments since the end of 2003. At that time, the average standard variable rate was 4.19 percent. By March 2007, the average was up to 6.15 percent. Now, with the new rate hike earlier this month, many major mortgage lenders are charging 7.5 percent or more.

With more interest rate hikes expected from the Bank of England, it could be a good time for borrowers to think about their needs from a loan, according to Mform’s marketing and business development director. He suggests that many borrowers might be best off to seek out a fixed-rate mortgage, at least in the short term. On the other hand, he points out that if Bank of England interest rates peak at 5.75 percent and then go down, a standard variable rate mortgage might not be such a bad deal.

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