Whats covered in this Article
The term ‘Fixed Rate Mortgage’ is self-explanatory – it refers to mortgages in which the interest rate stays fixed throughout an agreed term. They are a way for people to guarantee their mortgage payment remains the same for a specific period of time – anything from a year to 10 years (although most are for 5 years) – before the mortgage reverts to the Standard Variable rate at the end of that period. They are gaining in popularity at the moment (whilst the economy is still precarious and the housing market is starting to rise again) thanks to incredibly low rates of interest meaning there has never been a better time to get a mortgage. People who are desirous of stability and certainty in their mortgage would consider fixed mortgages at the current low-interest levels (some contractor mortgage companies are offering below 4%) to be a good bet. This is reflected in the number of people currently signing up to longer term fixed mortgages (between 5 and 10 years) which were previously not that common. Should everyone sign up to a fixed-term mortgage? Whilst no one can doubt the value and stability they offer (particularly at current rates) there are, as always, a couple of things to bear in mind before signing up:
The Advantages of Fixed Rate Mortgages
As mentioned above, the chief advantage of Fixed Rate Mortgages is stability. With the global economy still volatile and the UK economy still precarious, borrowers who wish to avoid their investments being troubled by the movements of the base rate of the Bank of England should sign up to fixed rates now. By taking out a Fixed Rate Mortgage a borrower is buying themselves interest rate security for the period that the rate is fixed. That security covers not just the knowledge that you will not have to deal with a massive jump in interest rates (and therefore increased monthly mortgage payments) but also the security of being able to make future plans based around a constant and unchanging figure in your personal outgoings column. In fact, fixing your rates often means that the only change you will notice is a positive one – in which your income improves over the years whilst the payment amount stays the same and therefore decreases in percentage terms. In short:
- You know precisely what your mortgage payment will be, for a precisely defined period.
- You know that if interest rates rise, your mortgage payment will stay the same.
- You know that your mortgage is your largest outgoing but you can also budget for that outgoing with certainty.
The Disadvantages of a Mortgage which has Fixed Rate
Obviously there are some potential downsides to fixed rate mortgages otherwise everyone would be using them all the time. The clearest and most common downside is the chance that no matter what rate you fix your mortgage at there will always be the possibility of rates actually dropping below your fixed rate. This would make your fixed rate look expensive and be immensely irritating at the very least. You always have to remember therefore that while you are immune from rises in the Bank of England base rate you also cannot benefit from any reductions. So, in the last couple of years, when the base rate sank to 0.5%, if you had fixed your rate a year or two before that you would have lost out. Secondly, remember that most fixed rates will tie you to that lender for the duration of the fixed period and that if you decide you need to change, for any reason, you would probably be penalised for doing so. Most fixed-term mortgages, particularly those with longer terms, will have heavy early repayment penalties that can be anything up to 7%. What that means is it becomes extremely uneconomical to remortgage in that time. Similarly, should you want to move home there is normally the ability for borrowers to move their mortgage but with fixed term mortgages there can be problems with such porting. Borrowers with these kinds of mortgage will find that porting will be permitted on the basis that the borrower must meet the new criteria put in place at the time the move is to happen. This can cause problems if the criteria have changed in the intervening years or the borrower has had some changes to their credit status. If they cannot meet the new changes they are stuck with the old mortgage and cannot move. With this in mind, many people are simply not prepared to be locked into a mortgage for such a long time. In short:
- Higher arrangement fees
- Should interest rates drop, your payments stay the same and you could end up paying above the current rate
- If you need to repay your mortgage before the end of the fixed term, you will be forced to pay an early repayment charge.
- At the end of the term, depending on interest rates at the time, you could face a massive jump in your monthly payments.
It is possible to mitigate some of these disadvantages listed above – such as the jump at the end of the fixed rate period – by planning ahead and getting another fixed rate mortgage lined up. And as long as you know what you are committing to and are in for the long haul, then fixed rate mortgages make perfect sense. The risk of rates dropping lower is very minimal at the moment as rates are lower than they have been for many years and don’t look like they could go much lower. Indeed getting a mortgage fixed at current rates is probably a good thing for most people, with some mortgage companies offering interest rates below 4%.