Fixed Rate Mortgages
Most lenders offer fixed rate mortgages, providing a guarantee that the interest rate will remain fixed for a stated period. This has the advantage of giving borrowers a period of certainty about their mortgage payments.
Some lenders offer attractive fixed rates for a relatively short period, say, two years, after which the loan reverts to a variable rate. This is often done as a 'loss-leader' to attract new business. Usually, the lender will specify that the borrower must keep their mortgage loan with that lender for at least two years after the fixed rate period has expired (known as a product overhang).
Fixed rate offers are often made for a limited period, the lender having taken in a certain amount of money at a fixed rate and then lending the sum in question until it has been exhausted. They often charge an arrangement fee for allowing a fixed rate deal, which may or may not reflect the dealing costs of arranging the tranche.
Before deciding on a fixed rate mortgage a borrower should consider the following:
- Future trends in interest rates - in which direction are they likely to move and by how much?
- How their own income is likely to move. If it is likely to be variable, stay the same or increase only slowly for a period, a fixed rate mortgage for the same period may be useful.
- Whether they will be able to obtain another fixed rate at the end of the term.
- Early repayment charges and whether these may apply after the fixed term period.
Variable rate mortgages tend to be cheaper than the fixed rates products on offer at any given time but, in the long term, the fixed rate deal might turn out to be the better one. Much depends on what the borrower can currently afford and their views on the above factors.
Fixed rate mortgages invariably carry an early repayment charge which is payable if the mortgage is redeemed within the fixed rate period and, in some cases, years thereafter (product overhang). A borrower who is paying higher rates than the variable rate on offer must therefore decide whether to continue at the fixed rate until the end of the period or pay the early repayment charge in order to get out of the deal.
Most fixed rate loans can be carried on to a new mortgage (with the same lender) on moving house. Some may also offer a new fixed rate deal when the old one expires.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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