Fixed rate mortgages
A fixed rate mortgage provides you with the option
to fix your payments for a set period, typically between one
and three years although longer term fixed rates are available
(see below).
During the fixed rate period of a fixed rate mortgage you will make
the same monthly payments whether the lender’s interest rates
go up or down.
At present it is generally the case that the shorter the fixed
term, the lower the rate you will pay.
Advantages of a fixed rate mortgage
- A fixed rate mortgage offers you the security of knowing
exactly how much you will be repaying during the fixed rate period,
which
makes budgeting easier
- You have the security of knowing that if
interest rates rise during the fixed rate period, your monthly
repayments won't rise
Drawbacks of a fixed rate mortgage
- If mortgage rates fall then your fixed rate may prove
to be more expensive than a variable rate
- Early repayment charges are likely to apply for at least the
term of the fixed period
- In a few cases there may be an “overhanging” early
repayment charge. This means that an early repayment charge
applies for a longer period than the fixed rate period
- There
is generally an arrangement or booking fee payable for a fixed
rate mortgage
- After the fixed rate period ends, you will normally
have to pay the lender’s standard variable rate - so there
may be a large increase in your monthly repayments, particularly
if interest
rates
have risen during the fixed rate period
Longer term fixed rate mortgage
A longer term fixed rate mortgage provides you with the option
to fix your payments for a significant period, for example for
five years, ten years or even on occasion 25 years.
As with a shorter term fixed rate mortgage, you will make the
same monthly payments during the fixed period, whether the lender’s
interest rates go up or down.
Advantages of a longer term fixed rate mortgage
- In addition to the advantages of a fixed rate
mortgage, a longer term fixed rate also means you won’t
have to remortgage every two or three years
- Longer term fixed
rates may appeal to people who wish to know how
much they will pay for their mortgage over the long term, particularly
if their payments are a significant percentage of their monthly
budget
Drawbacks of a longer term fixed rate mortgage
- In addition to the drawbacks of a fixed rate mortgage
you should bear in mind that longer term fixed rate mortgages
often have significant
early repayment charges during the fixed period
- A change in your
circumstances may mean that the mortgage needs to be paid off
during the fixed period resulting in an early
repayment charge. The longer the fixed term the more difficult it can be
to predict if your circumstances may change
- If interest rates
fall significantly during the term of the longer term fixed rate
mortgage you could be paying a rate that is significantly
higher than ‘current rates’