A fixed rate mortgage pretty much does what it says on the tin – you are locked into an interest rate for a specified period of time.
The common duration is anything between two and five years, although it is possible to get longer periods of up to fifteen years.
Why would you want a fixed rate mortgage?
The main benefit is knowing what your monthly outgoings are likely to be. Whilst most of us face increases in utility bills, food shopping etc each year in line with inflation, knowing that what is likely to be your biggest outgoing is going to be static can give huge peace of mind.
If your budget is tight, or you are going through a change in family circumstances, such as a growing family, this can be really beneficial.
What else do you need to know?
Not all fixed rate mortgages are the same, so you need to do your homework first. It’s not as straightforward as just choosing the one with the lowest interest rate.
Many fixed rate providers charge an arrangement fee, and these vary quite a lot. When you do the sums, you can find the cost of the arrangement fee is significantly more than the difference in interest rate between them and a provider with a slightly higher rate. So, it costs you money, not saves it.
You also need to read the small print.
You can be tied into redemption fees if your circumstances change, so again take this into consideration.
Most lenders offer the flexibility to allow you to move, but that relies on the assumption that you wish to stay with the same lender. You know your family set up, so plan this into the equation if you think it’s likely.
Again, most fixed rate mortgages give you the opportunity to pay lump sums off the mortgage, or to overpay each month, if you have funds available. Typically, this is around 10% of the value each year – anything over that usually attracts a penalty fee. Do check with your provider, before you commit to this, if you think that’s likely to happen.
There are two types of fixed rate mortgage.
The more traditional is a repayment mortgage. Each month your payment covers a sum of interest and part of the capital borrowed. In the early years, it is mostly interest, but the longer you hold the mortgage the more capital you are repaying.
The alternative is an interest only mortgage. Still a fixed rate, but as the name suggests, you are paying off the interest only – not the capital borrowed. This has the benefit of giving you a lower monthly outgoing and provides you with more disposable money for you to live your life. Effectively, you are putting yourself and your family at the front of the queue for your “own” money!
The choice depends on your attitude to risk, and how determined you are to pay off your mortgage – we’ve debated this on our sister company website.
Generally, before making the decision to sign up for a fixed rate mortgage you may wish to look at the trading pattern of the Bank of England base rate. It can often be an educated guess as to whether or not the interest rates are likely to change – up or down – and therefore if there is a benefit in committing to a fixed rate. We are actually in one of the longest periods of modern times where interests rates are so low – they have been 3% or less for over 11 years now.
So, is a fixed rate mortgage right for you? That rather depends. But why don’t you give us a ring, and we can talk about it in more detail – 01344 875 310.