When choosing a loan there are a lot of decisions to be made. You have to think about how much you need to borrow, how long to borrow it for, which lender to choose and which loan type. It can be a difficult thing to do, especially if you do not get help from a financial advisor. One of the decisions you may have to make is whether to pick a fixed rate loan or not and this can be quite crucial.
A fixed rate loan will give you an interest rate which will be guaranteed not to change for a certain period of time. This gives you some security as you will know exactly how much you will need to pay each month. You will be able to calculate if this is something that you can afford and when you sign up you will know exactly what to expect. This means that you will be protected from any increases in interest, which happen normally when the Bank of England increases the base rate, but lenders may also increase their rates at other times as well. This can give you peace of mind in knowing exactly how much you will be paying and that you will be well protected from increases.
However, there are disadvantages as well. A fixed rate is normally set at a higher level to the current variable rate offered by that lender. This means that if the variable rate stays the same for the term of the loan, you will actually have paid more than necessary. It also means that if the variable rate drops you will have paid even more. This can be annoying as well as expensive and as you are normally tied into a fixed rate loan, you will not be able to switch to one that is cheaper. If this is a five year fix on a mortgage and rates drop significantly in that time, you could end up having paid a lot more than those on a variable rate.
If only we could predict what the interest rates are likely to do, we would know whether it was better to fix and protect against an increase of stay variable and get a lower rate as the interest drops. In some ways you can look at the data and consider whether rates are likely to rise or fall. If they are very low, it would seem more likely they would go up, if they are very high it would seem more likely that they would fall. However, things do not always behave as expected and shock election results, business collapse or problems with banks are some examples of unexpected things that could cause a big change in a countries economy and mean that rates change in an unpredicted way. It is easier to predict in the short term than the long term, but even so, nothing is definite.
It can be wise to do a lot of research and to speak to a financial advisor about the pros and cons, particularly if the fixed rate period is quite long. You will need to understand fully what the consequences are of having a fixed rate so that you can decide whether it is the right thing for you. You do not want to have any regrets in either direction and if you are borrowing a lot of money, a few percent difference in interest could have a significant impact on the actual amount of costs you pay for the loan. It is also important to think about the effect it has on you personally. If you are likely to panic about rate increases and feel that you will not be able to afford bigger repayments, then the fixed rate option could help to keep you calm. However, if you are likely to feel regret if the rates down and you are locked in and cannot take advantage it may be better not to go with a fixed rate. It is a lot to think about.
Therefore it is up to you to look at the pros and cons of getting a fixed rate and think about which would suit you the most. If you could not cope with an increase in interest rates, then having a fixed rate will protect you against this. If you are willing to risk a rate rise in the hope that it will fall, then a variable one could be best. It is worth noting though that unless you have a tracker rate, there is no guarantee that a variable will fall even if the base rates do fall. It is a decision that should take a lot of thought and consideration and not be something you take on quickly. Imagine how you would feel if you were on a fixed rate and rates went up or down and alternatively how you would feel when rates changed if you were not on a fixed rate.