Fixed Rate Mortgages
What are fixed rate mortgages?
Opting for a fixed rate mortgage will mean that your mortgage payments are set for a fixed period of time and will not change regardless of what happens to the Bank of England base rate.
In other words, you will be charged the same interest rate every month for the term of the agreement, which means that you always know exactly what you will have to pay. This makes budgeting for your mortgage a bit easier, particularly if money is tight.
The most common lengths of time for fixed-rate mortgage terms are two, three or five-year terms, although you can get them for longer. When the fixed period is over your loan would then revert to the lender’s standard variable rate (SVR). It used to be the case that fixed rate mortgages were normally a little lower than the SVR but with interest rates now at record lows it is often the other way around.
Short-term or long-term fixed rate mortgages?
Fixed rate mortgages which are classed as short term are those where the period of the fix is five years or less. The periods for long term fixes are greater than five years and can be up to 25 years. Generally 25 year fixes (sometimes called Lifetime mortgages) are rare and very much a niche mortgage product.
On the whole, the shorter the term of the fix the lower the rate is likely to be as you pay a premium for having the prolonged period of security. Short-term fixed rate mortgages are popular because they give the borrower the chance to reassess the market when the fixed period finishes. Rather than just opting for the cheapest deal though, you need to consider whether or not you think that interest rates are likely to be higher or lower when the period of the fix comes to an end than they were when you first took out the mortgage. Meaning , if you opt for a two year fix and you think that rates will be higher when that deal comes to an end you may be better off paying a bit more of a premium and getting a slightly longer term fix now.
What are the pros and cons of a fixed rate mortgage?
Pros of fixed rate mortgages:
The main advantage of having a fixed rate mortgage is that it gives you peace of mind and makes budgeting so much easier. And if the Bank of England’s base rate rises during the period you could end up saving yourself thousands of pounds. Needless to say, the converse is also true and if the base rate falls you could be stuck paying a rate over and above the lender’s SVR.
Cons of fixed rate mortgages:
Other things to watch out for are the fees associated with a fixed rate mortgage. Arrangement fees and early repayment charges (ERCs) tend to be higher. Most fixed rate mortgages will have ERCs throughout the term of the fix. For example, a 10-year fix could carry a set penalty – maybe 5 or 6 per cent of the outstanding mortgage – for the first five years and then gradually reduce over the remaining 5 years.
As you can see there is a lot to consider so it is worth talking to a mortgage advisor. Mortgage advisors will advise you on all the different options and will also probably have access to deals and offers on fixed rate mortgages that are not readily available on the high street.