Mortgages Guide | Mortgage Help Product Information

TheMoveChannel.com | Variable Rate Mortgages

Introduction

Fixed rate mortgages guarantee a specific rate of interest for a set length of time. Most commonly, this is for between one and five years, though it can be as long as ten, fifteen or even 20 years.

As a rule, the longer the fixed period, the higher the rate of interest will be. A lender will not want to commit to lending you money at a really low interest rate for ten years, when there is a fair chance that during that period the general level of interest rates may rise above the rate at which they are lending you money. Therefore, among fixed rate deals, the lowest interest rates are usually to be found with deals that are fixed for one, two or three years.

It is also possible to find stepped fixed rate mortgages, where the interest rate is, for example, fixed at one level for one year and then a slightly higher level for two further years.

Advantages

One of the best things about fixed rate mortgages is that they provide you with certainty in an uncertain world. Whatever happens to the economy and irrespective of any changes in the Bank of England base rate or the lender's own SVR, the interest rate payable on your mortgage will stay the same during the fixed period. This makes it much easier to budget for the costs of home ownership with a fixed rate mortgage than it is with any other type of rate, as you can be sure that your repayments will stay the same for a certain period of time.

A good time to buy a fixed rate mortgage is often when the base rate is at a historically low level, or when there is a strong possibility that the Bank of England Monetary Policy Committee (MPC) will raise the level of interest rates at some point in the not too distant future. Your repayments would be protected against any increase in lending rates that followed a base rate rise - something that would not be the case had you opted for a discounted rate mortgage.

Disadvantages

Although fixed rate mortgages give you security that your repayments will not rise, this peace of mind usually comes at a slight cost, in that fixed rate mortgages are often offered with marginally less competitive rates that an equivalent discounted rate mortgage.

Furthermore, you could potentially be locking your repayments at a needlessly high level were interest rates to fall during the fixed period. Take the year 2001 for example. During the course of the year, the MPC made 7 cuts to the base rate, a pattern that was mimicked by the majority of lenders with repeated cuts in their lending rates. Any mortgage customers who fixed their rate of interest at the start of 2001 will have missed out on these successive reductions and are probably still paying a rate of interest that is considerably higher than that which is available to new borrowers.

Of course, customers that are stuck paying an uncompetitive fixed rate of interest could always switch to another product or remortgage with a different lender. But another feature of fixed rate mortgages is that they normally tie the borrower into the deal with expensive early redemption penalties that become payable should the customer wish to change mortgages within the fixed period.

This is understandable and acceptable to most people, as long as the redemption penalties are only payable for the duration of the fixed period. However, some of the most competitive fixed rate mortgages have a redemption penalty overhang. This is where the redemption penalty continues beyond the fixed rate period, effectively tying you in for a longer period. At the end of the fixed period, the rate of interest payable will revert to the lender's Standard Variable Rate, which is usually much higher than that rate you were previously paying

A final point that you need to be aware of, which is a feature of all mortgage rates that come with some form of introductory offer, is the possibility of an interest rate shock at the end of the fixed rate period. This is simply where your mortgage repayments jump upwards from one month to the next due to the higher rate of interest payable on your loan after the end of the introductory period. With a fixed rate mortgage, this phenomenon can be made all the more difficult financially if the base rate and subsequently the lender's SVR have climbed during the fixed period, making the hike in repayments all the more severe.