Interest rate type
Fixed-rate mortgages are the simple, reliable ones that everyone understands
The concept is simple Ė no matter what happens to the base rate, your monthly repayments remain the same for the duration of the initial deal. Rarely the cheapest mortgages on the market, there are nonetheless a range of attractive products offering affordable stability. Current low interest rates have also narrowed the gap between fixed and discounted rates in an unprecedented way.
With a variable-rate mortgage, your payments go up or down according to the Bank of England base rate. If interest rates go up, fixed-rate customers have the satisfaction of knowing that their payments will not follow. However, this also means that if they fall, your interest repayments will remain as high as they ever were for as long as the fix lasts.
Even if interest rates do remain level, youíre still likely to pay slightly over the odds because fixed rates tend to be offered at a higher initial rate than variable ones. This is a premium for the peace of mind a fixed rate gives you, as the fluctuations in the Bank of England base rate can never be wholly predicted.
The price of a fixed rate depends on the length of time you fix for and the amount you need to borrow in relation to the value of your home. As a general rule the greater your deposit or equity in your home, the lower the rate will be.
The initial fix can vary from as little as six months to as much as 10 years or even the term of the mortgage. Deciding how long to fix for is up to you, depending on how you feel interest rates will go. However, two and three-year fixes are the most popular.
Itís important not to fix for longer than you think you will be comfortable with, as one of the biggest disadvantages of fixed rates is that if you want to remortgage before the fixed period is up you may have to pay sizeable early redemption charges (ERCs).
You also need to consider the length of time you could be tied into the mortgage at the end of the initial period. This is the set period of time when your rate has reverted to the lenderís standard variable rate (SVR) but you canít remortgage to a more favourable one without incurring ERCs.
The tie-in period can last for several years and cause quite a jump in your monthly repayments. Low initial rates often have longer tie-in periods so check this carefully.
With such low rates, the temptation to fix for a long time is strong and people with large financial commitments and who are likely to remain on a tight budget for several years could benefit from fixing for 10 or more years. Extremely long-term fixes arenít currently popular with either lenders or borrowers.
Security tends to come at the cost of flexibility, however. When deciding how long to fix for you need to consider that not only could the Bank of England rate fluctuate but your own circumstances are likely to change significantly in the next 10 or 15 years.
It makes sense to choose a fixed rate when you think rates are likely to rise. Rates are currently at a low, and while fixed-rate mortgages are an increasingly popular choice because of the savings that can be made, no one can be absolutely certain which way rates will go.
Need to know
- Repayments stay the same during the period of the initial deal, whatever happens to the base rate
- Initial deals range from six months to 10 years or more
- Good for first-time buyers and anyone on a budget
- Worthwhile if you think interest rates will go up
- Interest rates are usually less competitive than for other mortgages
- Early redemption charges can be high should you want to change your mortgage before the initial period is over
- You could be tied into an unfavourably high SVR once the fixed period finishes
Information source: Mortgage Advisor and Home Buyer publication