Should you get a fixed-rate or variable mortgage?

Should you get a fixed-rate or variable mortgage?

Signs show that mortgage lending is beginning to pick up. Figures from the Council of Mortgage Lenders (CML) released in May revealed an increase of 25 per cent in mortgage approvals in March 2010 compared to the previous month. This represented a year-on-year increase of 45 per cent.

What's more, first-time buyers are now beginning to take their first steps onto the property ladder again, with the CML data showing a 27 per cent increase in March for new buyers compared to the previous month and a 42 per cent increase compared to the same period in 2009.

Yet, while lending is improving, the age-old question of which mortgage product is right for you still stands.

Independent financial research firm Defaqto revealed in May that there are almost 3,000 different mortgage products on the market - to be exact - 2,948 at the time the research was published on May 10th.

However, Defaqto also found that financial institutions were restricting 25 per cent of these mortgage products to their existing customers, often at preferable rates.

Kevin Bray, insight analyst for banking at Defaqto said: "The banks are clearly keen to further their ambitions of becoming one-stop shops for all their customers' personal financial product needs and offering special mortgage deals to their current account customers is a definite part of this strategy."

Regardless of this, one of the key questions that any consumer must ask themselves before they begin shopping for a mortgage is if a fixed-rate or variable product will be best.

Fixed-rate products are pretty much do what they say on the tin, offering borrowers a static level of payment for a set period of time. Those with variable mortgages will see their payments change in line with interest rate fluctuations.

The Bank of England has had its interest rates at a historic low of 0.5 per cent since March 2009, although this is due to be reviewed on June 10th.

This has been good news for those with tracker mortgages, as their payments have been comparatively low for the past 15 months. However, speculation is rife about when this interest rate will increase.

According to the think-tank the Organisation for Economic Cooperation and Development, interest rates will have to rise as high as 3.5 per cent by the end of 2011 to curb inflation, making these tracker deals much less appealing.

However, the general consensus is that the interest rate will not be raised in the coming months.

In contrast, those on fixed-rate deals will see no difference if interest rates increase, mitigating the risk that payments could become too high for them to handle.

Simon Tyler, from Tyler Mortgage Management, writing for the BBC recently said that depending on circumstances interest on a tracker deal is between 2.4 per cent and three per cent, while fixed-rates are usually around 2.7 per cent to 3.25 per cent.

Paragon Mortgages revealed recently that currently fixed-rate business is at its lowest level since the final quarter of 2008 in May; the first time that it has been lower than tracker mortgage business since 2009.

Of those who were taking out fixed-rate mortgages, deals lasting two to three years were the most popular.

John Heron, Paragon Mortgages' managing director, explained: "The proportion of borrowers opting for tracker mortgages has been growing since last summer as borrowers look to take advantage of low interest rates."

Yet, a number of financial institutions are now opening up a third avenue for those who are still unsure which product is right for them.

HSBC launched a new Spilt Loan Mortgage in April, which allows the borrower to fix a proportion of their mortgage and allow the rest to vary in line with interest rates.

Actual interest rates will vary depending on the loan-to-value of the mortgage, but all borrowers will be able to choose to fix 25, 50 or 75 per cent of their mortgage.

Nationwide is also offering Switch & Fix deals, which allow the borrower to change from a tracker to fixed-rate product before the end of the deal without having to pay early repayment charges.

So, the most important thing to do before purchasing a mortgage is to do your research, consider your long-term needs and choose the best product.

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