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Complete Guide to Mortgages |
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Fixed-Rate Mortgages
Are the
straightforward, reliable products that everyone
understands. Good for first-time buyers and anyone on a
budget who needs the stability of a set monthly repayment.
The concept is simple and uncomplicated: 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 now
available that offer stability at a very affordable
cost. Current low interest rates have also narrowed the
gap between fixed and discount rates in an
unprecedented way.
Interest
Rates:
With a
variable-rate mortgage, your payments will 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 it. However,
this also means that if they drop low and stay low, your
interest repayments will remain as high as they ever were
for as long as the fix lasts.
Furthermore, even if interest rates remain level, you're
still likely to pay slightly over the odds because fixed
rates tend to be offered at a higher initial rate than
variable ones. But this could be thought of as a bearable
premium
for the peace of mind a fixed rate gives you -
fluctuations in the interest rate can never be wholly
predicted.
Costs:
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 amount of equity in your home, the lower the rate will
be.
The initial fix can vary from as little as six months to
10 years or even the term of the mortgage. Deciding how
long to fix for is entirely up to you, depending on how
you believe interest rates are going to go. However, two
and three-year fixes are the most popular.
It is very 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 to do so.
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 after the introductory rate
finishes when your rate will revert to the lender's
standard variable rate (SVR) but you can't remortgage to a
more favourable rate without incurring redemption fees.The
tiein period can last for several years and can represent
quite a jump on your monthly repayments if interest rates
have gone up. Low initial rates often have longer tie-in
periods so check this carefully.
Long-term
fixes
With such
low rates, the temptation to fix for a long time is strong
and people who have large financial commitments and look
likely to remain on a tight budget for several years could
benefit from fixing for 10 or more years. Long-term fixes
aren't currently popular with either lenders or borrowers
but they are a viable option if you decide you would
benefit from that kind of security.
However, security tends to come at the cost of
flexibility. When deciding how long to fix for you need to
consider carefully that not only may the Bank of England
rate fluctuate but, closer to home, your own circumstances
will probably alter 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 record 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 they will go.
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subject to status.
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