Fixed rate mortgage guide
We explain the potential benefits of a fixed rate mortgage and what to bear in mind before getting one.
What is a fixed rate mortgage?
A fixed rate mortgage allows you to keep your mortgage at a set interest rate for a duration agreed with your lender when you take out the loan.
This means that for the specified period, you’ll know exactly how much you have to pay each month and won’t need to consider the implications of adverse interest rate changes.
Stability or flexibility?
Knowing that your monthly mortgage payments will remain the same is one of the major benefits of a fixed rate mortgage, allowing you to organise your finances efficiently and prevent any nasty surprises if interest rate fluctuations don't work in your favour.
There’s also plenty of flexibility available when it comes to fixed rate mortgages. The most appropriate product will depend upon the period of time over which you require it to be fixed and how long you’re planning to stay in your home. You may also want the flexibility to be able to make overpayments if your circumstances allow. This can be catered for with some fixed rate mortgages which often allow you to overpay as much as 10% of the balance each year.
One of the other major considerations when taking out a fixed rate mortgage - or any financial product - is looking at the likelihood of your financial circumstances changing over the ensuing years after you take out the loan. It’s important to ensure that you’re not likely to place yourself under undue financial strain, and a fixed rate product can help with this thanks to its ability to keep repayment schedules as simple as possible.
Planning for the end of your fixed period
It should be remembered, however, that your fixed rate mortgage will revert back to your lender's variable rate (usually called the Standard Variable Rate or SVR) once your set period has ended, unless you remortgage to another deal. Looking into your options at least three months before the end of this period should give you plenty of time to find a more suitable deal before your current deal expires. Another consideration is that you won’t benefit if interest rates go down as your monthly repayments will stay the same regardless.
Deciding the fixed period length
If you do decide on a fixed rate mortgage then the rate that you pay can be fixed for two, three, five, or ten years depending on the product you choose. The interest rate you will pay will vary according to the amount of time over which you want to fix the rate. In general, the longer the fixed rate period, the higher the interest rate you’ll be asked to pay.
This means that you'll repay more if you choose to fix your rate for longer, when compared to shorter fixed rate terms. However, many people struggle to plan without the security offered by a fixed rate mortgage and monthly repayment amounts that are set in stone. A little extra each month may be more than worthwhile if it allows you to budget effectively, protect you from fluctuating conditions and helps to preempt any financial difficulties associated with a sharp rise in interest rates.
Advantages of fixed rate mortgages
The main benefit of choosing a fixed rate mortgage is the stability it provides in terms of financial planning.
Knowing exactly how much your mortgage repayments will be for a set period of time can make financial planning so much easier, allowing you to budget without having to factor in a contingency for interest rate changes.
This offers the comparative security of knowing that you won’t be affected by The Bank of England increasing interest changes during your fixed period. Your payments will remain the same.
Therefore, a fixed rate mortgage can offer you:
A clearer view of future financial commitments
Confidence in your financial circumstances over a set period of time
Immunity from interest rate changes during the fixed rate period
Information to make forward financial planning as easy as possible
Protection from financial difficulties caused by unexpected interest rate changes
Clarity as to the month cost of borrowing your required sum
If you secure a fixed rate deal then have to move home earlier than expected, most lenders will allow you to port your mortgage to the new property and will assess affordability if you require an additional 'top up' to your loan amount.
Disadvantages of fixed rate mortgages
As outlined, there are very clear benefits to choosing a fixed rate mortgage, thanks to the additional financial stability and security it can offer over a specified period.
However there are also some downsides, not least of which is that if interest rates do fall during your fixed rate period you won’t get the benefit of the decrease and your repayments will stay the same rather than going down.
Other disadvantages of fixed rate mortgages include:
Once you decide on the fixed term of your loan, you won’t be able to remortgage even if you spot a better deal elsewhere. You could pay the Early Repayment Charge but this could outweigh the potential savings of switching.
You may end up paying more over the period of your fixed rate mortgage than you would with a comparable variable rate loan if interest rates don’t run in your favour.
Fixed rate vs. variable rate
A steady rate
Arguably a benefit of fixed rates is that you know exactly what the rate and repayment amount will be each month throughout the agreed term.
As you know what your payments will be, you can more easily stick to a budget if you need to.
Higher exit fee
Fixed rate mortgages can have higher exit fees, particularly throughout the fixed period, so it might not be so appealing to switch mortgages.
It's not forever
At the end of the fixed rate period you’ll be transferred to a standard variable rate which tends to be higher and more costly.
Unlike a fixed rate, a variable rate can fluctuate - it could end up a lot more expensive, but it could also go the other way.
Risk and reward
As you’d be putting yourself in a more risky position in terms your variable rate’s unpredictability, lenders might initially offer a lower rate.
No early repayment fees
With a variable rate there usually aren’t early repayment fees. So you can make early repayments with more peace of mind.
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Your home could be repossessed if you don't keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgage.
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