Do you want the security of keeping your monthly repayments at the same price? Would you like to save money if interest rates increase in the future? Do you like having a steady budget?
If so, a fixed rate mortgage might be the right mortgage for you.
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With fixed rate mortgages you are consistently charged the same interest rate for a set period of time. This period could be any number of months or years, although the commonest are 2, 3 and 5-year fixed periods. The rate you pay during this period is usually lower than the lender's Standard Variable Rate when you initially take out your mortgage.
There are short-term fixed rate mortgages (typically between 6 months and 5 years) and long-term fixed rate mortgages (usually between 5 and 25 years).
Approximately 80% of borrowers who take out a fixed rate mortgage opt for a short-term fixed period. The shorter term is appealing to many borrowers because you can reassess the market after your fixed term finishes. If you determine that your deal was not the most competitive, you are free to switch to another deal. However, the pendulum can swing both ways. You may come to the end of your short-term fixed rate mortgage only to realise you were in a very good deal, but now you have to face higher rates and fees.
Once your short-term fixed rate comes to an end, you are put on your lender's standard variable rate (usually set at around 2% above the Bank of England's base rate) until you decide to remortgage. However, be cautious of having to constantly remortgage. With each remortgage you may face new valuation fees, legal charges, and application fees. For example, if you were to remortgage every 2 years over a 25 year mortgage, you could end up spending approximately £13,000 in fees.
However, short-term fixed rate mortgages tend to offer the lowest fixed rates available, which could balance out the fees and costs of remortgaging.
More borrowers are starting to look at long-term fixed rate mortgages these days because these deals offer more security over a longer period. If you take out a fixed rate mortgage over several years, you will consistently be working on the same budget. This protects you from coming out of a short-term fixed rate only to face higher rates.
Since you will be in the same deal for a long time, you will pay fewer instances of fees and save a great amount on remortgage charges. You also have a few more flexible options with a long-term mortgage since you are sometimes allowed to make overpayments to decrease the time it takes to pay off your loan. You may also be offered lower early redemption charges (ERCs) which will save you money if you change or pay off your mortgage early. Some lenders will offer deals that have no early redemption charges after a certain period of time (usually 5 or 10 years).
Although they can save you money on fees, fixed mortgage rates tend to be higher if you take out a long-term mortgage. Additionally, you will find it more difficult to remortgage if the interest rates fall.
[chart comparing short and long term – Compare Fixed Rate Mortgages]
Possibly. The success of a fixed mortgage depends on what happens to the Bank of England's base rate. If the base rate increases, you can save thousands of pounds by having a secure lower fixed rate. But if the base rate decreases, you could be stuck paying more than borrowers on a variable rate. Unfortunately it is impossible to predict what will happen to the base rate. Therefore, you have to find the mortgage that best suits your lifestyle.
If you want to know exactly how much you will pay each month, a fixed rate mortgage is probably the best option for you. However, you have to be willing to pay for the cost of security provided by a fixed rate. You should contact a professional mortgage adviser to discuss the practicality of a fixed rate mortgage and see if it is worth your while to pay the price of security. An adviser will not only suggest the best type of mortgage suited for you and your lifestyle, but will also search through thousands of deals to find you the best offer available.
Make sure you check all the fees attached to a fixed rate mortgage. Different lenders offer different deals, but usually fixed rates come with the heaviest fees of any type of mortgage. A huge arrangement fee may end up counteracting any savings you thought you were getting with a lower rate deal (this especially affects short-term fixed rate mortgages since you constantly pay arrangement fees when you remortgage).
Be aware of deals that charge arrangement fees based on a percentage of your loan instead of a fixed cost. These arrangement fees come at a high price and can cost you dearly over the course of your mortgage. The best fixed rate mortgages that save you the most money in the long run are usually the ones that charge a fixed arrangement fee.
Fixed rate loans may also have higher early repayment charges (ERCs) which add to the cost of changing your mortgage or paying off your loan faster.
Also keep in mind that fixed rate mortgage deals may be priced at a premium rate since the lenders tend to assume the base rate will increase. In this case you are basically already paying for an interest rate rise that hasn't even happened yet! So make sure your desired fixed rate really is the best offer available before agreeing to this rate.
Mortgages with a fixed rate offer you peace of mind when you take out your mortgage. By knowing your monthly repayments for a set period of time, you don't have to gamble on the market. Unlike a variable rate mortgage, you don't have to stress about the likelihood of the interest rate suddenly increasing.
Approximately 75% of homebuyers in the UK get a fixed rate mortgage. These deals are particularly useful if you are on a tight budget (especially if you are a first-time buyer or have debts or dependants) and need the security of consistent repayments.
You may also want to consider variable rate mortgages or tracker mortgages (to benefit from any interest rate drops), capped mortgages (which combine fixed and variable rate features), and discount mortgages (which are variable but with a special discount in the early stages of your mortgage term).
Just fill in this short form and a mortgage adviser will contact you to answer all of your questions, give you fixed rate mortgage advice, and get you on your way to buying your home.
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