Variable rate mortgage or other?

Mortgage market stability has been an issue over the last couple of months as the sector reshapes itself to deal with the economic climate, which could be a good time for people to seek new deals.

However, while moving to a new rate may look lucrative to some, it also poses a major conundrum for borrowers torn between opting for a variable rate product or tracker mortgage and a fixed deal.

Variable rate mortgages have remained a top favourite among many homeowners because of their ability to track the official Bank of England base lending rate, which is currently at just 0.5 per cent.

UK interest rates have been at this historically low level for the last few months thanks to the Bank's Monetary Policy Committee's efforts to stimulate the economy in light of the global economic downturn.

The low rates mean that borrowers on tracker mortgages have been enjoying particularly low repayment levels as their counterparts on fixed deals continue paying at original agreed terms.

So what are the advantages of a tracker product? The first obvious appeal is the ability of the interest rate on the mortgage to adjust with interest rates in the marketplace.

In light of the fact that mortgage payment figures are largely determined by the interest rate on the loan, this is a particularly good feature in times like these when rates are very low.

However, this advantage also works out as a disadvantage in an environment where interest rates are high or rising as it means variable rate mortgage holders get to feel the pinch with every upward movement.

This can lead to a dramatic hike in monthly payments, making what was once a cheap and easy-pay loan a burdensome debt that may be all the more difficult to deal with as everything else could also be expensive in light if the high rates.

Due to this dependence on interest rates, variable rate mortgages may not look that appealing, especially in a recovering economy where interest rates may rise, but borrowers still keen on getting one have some tools with which to protect themselves.

To shield themselves from being adversely affected by market conditions, borrowers can obtain mortgages that have restrictions governing how much an adjustable rate mortgage can actually change.

Borrowers can place a cap on the amount of interest applied to their mortgage, restrict how much they can part with every month or even opt for products giving a security period before the interest jumps upwards.

As with any financial product, it is vital for house buyers to seek the opinion of an expert such as a whole of market mortgage adviser or broker who can give guidance on what kind of product is suitable for their circumstances.