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.