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Are borrowers better off opting for fixed rates rather than going for cheaper variable rates?

Individual circumstances rather than market conditions should determine brokers’ choice of deals for their clients, say our experts

Iain WIlliamson is head of key accounts at BM Solutions.

When selecting any financial product, the right choice is as unique to an individual as their DNA. To suggest that one group of products has an advantage over another would be irrational.

There’s always interest in the difficulties first-time buyers face in getting onto the property ladder. There’s no doubt that some first-timers will benefit greatly from the repayment certainty that fixed deals offer.

But couples with a dual income and no kids – Dinkies as they are known – and others entering the market with higher incomes could benefit from lower variable rates in the short term, as the consequences of a rate increase would be easier to absorb. Similarly, the nature of the buy-to-let market means that variable rates can offer the best solution for landlords.

It’s true to say that some may be deterred by the increase in fixed rates that has followed recent market movements, as the security and stability provided by these products will be valued differently by each buyer.

Stability can be an important factor for the sub-prime sector. The assurance of monthly repayments can be key to budgeting when taking the first step towards stabilising finances.

In the short term, fixed products allow this security but it’s important that buyers shopping around in the market take a longer term view. Those coming off fixed deals of around 4% from two years ago will face payment shock when looking at the rates available in today’s market.

The decision can be complex and baffling. Borrowers should seek advice from brokers who will use their expert knowledge to address each situation. After all, it’s individual circumstances rather than market conditions that determine the right product for a buyer.

Darren Pescod is managing director at The Mortgage Broker

Whether borrowers should take fixed rates or slightly lower variable rates can be a tough decision and the ans-wer varies according to clients.

Many factors will play a part when making this decision including a consumer’s attitude to risk, their budget and how much they value peace of mind.

For example, some clients are willing to pay a slight premium for fixed rates as they perceive that variable rates will rise. This is especially the case when disposable income is tight.

Consumers with slightly more risky attitudes and more disposable income may choose to opt for the lower variable rate and take their chances when it comes to future interest rates.

In their eyes, they can afford any potential increase in mortgage rates and hope to make savings with cheaper variable rates. If rates and their costs go up, these clients won’t sit around worrying about their decisions.

Other clients are willing to pay a slightly higher monthly rate because they value their peace of mind. In this scenario, they do not want to worry about fluctuations in their mortgage payments and are not concerned if interest rates fall further.

These consumers love stability above all and will take comfort from the fact that this type of financial decision is only made once every couple of years.

It is down to advisers to choose the correct products for clients after discussing the pros and cons of each deal. The products must be matched to consumers’ attitudes to risk, their budgets and their wishes.

It is not up to advisers to predict which way interest rates will go. The decision on whether to go fixed or variable must be based solely on clients’ needs.


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