Introduction to fixed rate mortgages

So, you’ve made the decision to buy your first property, but how do you know which is the best mortgage for your needs? In this new series, Money Saving Advice takes an in-depth look at the types of mortgages available on the market to help you choose the right product to finance your home.

Here we look at fixed rate mortgages. This is a deal in which you agree a set monthly repayment at a consistent interest rate. Normally these deals are agreed for a limited time period, typically 2,3 or 5 years, after which the deal will not apply and you will need to remortgage with either your current lender or a new provider.

What are the benefits of a fixed rate mortgage?

First and foremost, fixed rate mortgages offer a peace of mind. Although the interest rate may fluctuate, because you have agreed a set rate with your lender the repayment will not change during the length of your deal. This is particularly comforting if you are on a tight budget where you cannot guarantee the ability to pay more towards your mortgage if interest rates rise.

Regardless of your financial situation, fixed rate mortgages make budgeting easier because the rate remains constant and you can spend your remaining income however you best see fit.

People with mortgage products linked to the interest base rate will see their repayments rise if the base rate increases. Fixed rate mortgage holders do not have to worry about this occurring.

Even if interest rates fall, being on a fixed rate mortgage can still benefit you. If you’ve chosen a repayment mortgage – where you’re paying off the money you’ve borrowed rather than just the interest on top of it – then effectively you’re making ‘overpayments’ in comparison to people who are on a variable rate mortgage. This means you’ll be reducing your debt at a quicker rate, which ultimately means your mortgage is getting smaller and you will be debt-free sooner than if you opted for a mortgage linked to the interest base rate.

What are the negatives of a fixed rate mortgage?

There are some negative aspects to taking out a fixed rate mortgage. Firstly, most banks charge an arrangement fee for taking out a mortgage, however this also applies to the majority of variable rate mortgages.

Secondly, because you’re on a set payment plan you could be penalised if you choose to overpay on your monthly instalments. Equally, if you choose to switch mortgages or pay off your debts in full before the deal comes to an end, you may be charged an additional exit fee.

Thirdly, if interests rates fall it tends to be in response to worsening economic conditions. This means you could feel your finances squeezed as utility bills, food costs and such like rise and your mortgage repayments remain the same. You will not feel the benefit of your friends on variable rate mortgage, whose repayments decrease in line with the lower interest base rate.

Am I best suited to a fixed rate mortgage?

Generally speaking, fixed rate mortgages are well suited to potential homeowners that have a certain budget in mind that they want to speak to. If you’re looking for peace of mind and steady monthly outgoings, fixed rate mortgages are an ideal option for you.

I’ve got a fixed rate mortgage: what happens when my deal comes to an end?

Whether it’s a 2, 3 or 5 year agreement, when your fixed rate term finishes your lender will place you on their standard interest rate. If you entered your fix at a high interest rate and the base rate has dropped since then, you may find that this basic rate offers you a lower rate of interest than your deal and as a result your payments will decrease.

On the whole, the standard rate provided by your lender will not be as good value for money as other deals on the market, meaning you’ll be paying more interest than you need to on your mortgage. The best thing to do is to look at new fixed rate deals available and see whether you’d be better off signing up to a new agreement.

Even if your lender’s basic rate offers cheaper repayments, keep an eye on the interest base rate. When it starts to rise, so will the standard interest rate you are being charged because you are no longer on a fixed rate deal. It may be a better option to apply for another fixed rate mortgage at this stage.

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