With a fixed rate mortgage, the interest rate, and thus your monthly payment, remains the same for a specific period. After the period for which your mortgage rate is fixed, your mortgage payments will become variable unless you arrange another fixed-rate deal.
Advantages of fixed rate mortgages
Peace of mind – you know exactly how much you will pay each month, making it easier to budget.
You won’t need to worry about payment increases caused by interest rate volatility during the specified period in which your rate is fixed.
Disadvantages of fixed rate mortgages
If interest rates drop below your mortgage rate, your mortgage payments won’t fall.
Early repayment may incur significant charges.
Factors to consider when taking out a fixed rate mortgage
Length of the fixed rate period
Fixed rate periods vary from several months to 20+ years. Typically, longer durations mean higher interest rates and higher early repayment charges.
If you believe that the base rate might fall, you may want to choose a mortgage with a short fixed rate term. However, if you think that base rate will increase or remain volatile, you might want to choose a mortgage with a longer fixed rate term.
Fees & charges
Lenders may charge an arrangement fee, which can sometimes be added to the mortgage balance. If you are switching providers to save money, high fees might negate much of this saving.
On the plus side, if you are switching to a new provider, they might pay some of the associated costs, such as legal and valuation fees.
If you pay your mortgage off before the end of the fixed term period, some lenders will impose a ‘redemption tie-in’ (early repayment charge). This is usually a percentage of the remaining balance, and the amount that you would need to pay may decrease each year that you stay on your mortgage. Sometimes discounted fixed rate mortgages are subject to extended tie-ins, where a penalty is imposed even after the fixed rate period has ended.
Sometimes, depending on your financial circumstances, you might wish to overpay or underpay your mortgage for a few months, or even take a payment holiday. If the flexibility to do this is important to you, make sure that you choose a fixed rate mortgage that allows this.
Make sure that you can transfer the mortgage to a new property if you move house before the fixed rate period expires.
After a fixed interest rate
Also, quite often after a period on a fixed mortgage, you have to move to your lender’s standard variable rate. Again, this is a way of them making more money out of you and there is usually a decreasing penalty as you near the end of the standard variable rate that follows.
Who is a fixed mortgage for?
Who would typically choose to fix the rate of their mortgage? Well, those people to whom the financial security of knowing how much they will be spending on their mortgage each month is worth more than potentially saving some money if interest rates drop. You are sacrificing future possible savings for the security of knowing that your payments are affordable.
So, if you do not mind if your mortgage may not be as cheap as it could be in the future but want the security of easy budgeting, talk to your financial advisor about a fixed rate mortgage and the benefits it might have for you.