Fixed Rate Mortgages
Fixed rate mortgages are among the most popular on the UK market because they make it easy to plan ahead. As the name suggests the amount you pay each month will be fixed for a specified period of time, normally two, five, or ten years. This means whatever happens to the UK economy your monthly repayments will remain the same, which makes fixed mortgages a very popular choice amongst first time buyers, and anyone else on a tight budget that need to know exactly how much they will be spending each month.
The rate you pay for your fixed rate mortgage generally varies according to the term. The longer the term, the higher the interest rate is likely to be. To entice first time buyers, some lenders offer special deals on lower fixed rates which can bring considerable savings.
There are literally thousands of fixed rate deals on the market and before making a decision on any deal you need to compare those on offer. A good place to start is one of the independent comparison sites like moneyfacts.co.uk or moneysupermarket.co.uk which can compare thousands of mortgage deals at a time.
What are the benefits of a fixed rate mortgage?
With a variable rate mortgage the amount you pay may go up and down each month depending on the Bank of England base interest rate. In times of interest rate volatility this can be a big worry for those on a tight budget as there is no certainty how much you will be spending each month. With a fixed rate you have the security of knowing how much your mortgage repayments will be for a set period of time. If you think the interest rate is likely to rise in the near future, fixing your mortgage could save you money. At the same time if the interest rate suddenly plummets than you may find you are paying much more than you would be on a variable rate mortgage.
What are the disadvantages of a fixed rate mortgage?
When the term of your fixed mortgage comes to an end, your repayments will revert to your mortgage company's standard variable rate. This can sometimes be double or triple the low fixed interest rate that you may have been used to paying. Most mortgage deals that offer lower mortgage rates for a set period of time have what is known as a "redemption penalty". This is a penalty charge that you will face if you leave your mortgage early. A typical example would be a penalty of two percent for leaving in the first year, one percent in the second, and zero thereafter. This may not seem much but if you consider the average first time buyer will borrow one hundred and fifty thousand pounds for their mortgage. If they had to move house or change mortgage deals within the first year they would face a three thousand pound early redemption penalty, which is a considerable penalty.
A number of mortgage lenders also have what is known as "extended tie-in". This means you are tied into your mortgage deal long after the discounted part of the deal has ended. Which means you will be paying your lenders variable interest rate which is likely to be typically around 2% higher than their base rate. Should you leave in this extended tie-in period you will again incur a redemption penalty which is likely to be thousands of pounds.
Fixed rate mortgages also generally require an arrangement fee to set them up. Fees have risen sharply in the past few years, so you could now be paying in excess of £800 for setup fees alone on some deals. A large part of this fee is paid to mortgage brokers whose free advice is paid for out of these costs.
Flexible Fixed Rate Mortgage
A number of fixed rate mortgages now offer the ability to make extra payments each month. This can range from a capped limit of 10% of your total mortgage to unlimited overpayment with no charges.