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What is a fixed-rate mortgage?
So you’ve decided to buy a house and you need to get a mortgage – pretty straightforward, right? But as soon as you start looking you’ll realise it’s not quite as simple as all that – as well as different lenders offering different rates and terms, there’s also different types of mortgage: fixed, discounted, tracker and standard variable rate (SVR).
Here, we explain what a fixed-rate mortgage is.
In a fix
There are different ways to finance your home move, as you’ll discover when you start looking for mortgages. To find the right one for you, consider your circumstances and how good you are at money management.
A fixed rate mortgage, as the name suggests, is where the interest rate you’ll be charged is guaranteed not to move for the length of the fixed rate period. This means that your payments won’t change for that time: so, if your payment works out at £450 a month and your fixed deal lasts for two years then you’ll make 24 payments of £450 (which may or may not include any initial fees you have to pay for the mortgage).
This sounds fairly obvious and perhaps you thought that’s how all mortgages work. But actually, a fixed-rate mortgage is the only one that works in this way. A variable mortgage like a tracker follows the Bank of England base rate. If that goes down, your repayments fall too. But before you get excited and sign on the dotted line, if the base rate rises your mortgage payments do too.
Benefits of fixing
The main benefit of a fixed-rate mortgage is security – with a fix you know that no matter what happens with interest rates, your repayments will remain the same, at least for the length of the deal. This can make it far easier to work out how much you can afford to borrow for your new home (by calculating what you’ll pay back each month), and it makes it more straightforward to budget month-by-month too.
It’s been seven years since the Bank of England Base Rate was cut to 0.5 per cent. This makes borrowing cheaper and can make products like tracker mortgages pretty attractive. However, if rates go up your mortgage will too. A change of just a few per cent to the interest you’re charged could translate to you paying hundreds of pounds more a month, which may make your repayments unaffordable.
Disadvantages of fixing
With most things in life there are pros and cons, and fixed-rate mortgages are no different. The main point to note, of course, is that if interest rates fall then you won’t feel the benefit. In this case you could feel like you are paying over the odds for the life of your mortgage. So whenever you take a fixed-rate mortgage you are taking a bit of a “punt” on what you think might happen to rates in future. If they go up, you are quids in, but if they fall then less so! Of course, at the moment, with interest rates at historically low levels, many people think that the only way for rates to go is up anyway.
Secondly, you don’t know what interest rates will be when your fixed rate ends. Interest rates tend to go in cycles – they go up, then down, as the economy goes through growth spurts and recession. If you are lucky your fixed rate might end when rates are at a low – then your repayments won’t jump up too much. However, if your fixed rate ends when interest rates are peaking you may find you have quite a large jump in your repayments when you move to your lender’s SVR.
Should you stay fixed?
Your mortgage will only be fixed for the length of the deal you signed up to. If you’re a first-time buyer, it’s likely you’ll be offered a two-year fix, but it’s possible to get them for longer – anything up to ten years.
Once your deal comes to an end, your mortgage will probably convert to your lender’s standard variable rate, which follows the Bank of England’s rate (although it’s usually quite a bit higher than this). You can either stick with this or remortgage to a tracker or fixed deal.
If you like the security of a fixed-rate mortgage, you may be tempted to sign up for one again – and if there’s a longer deal available, it’s tempting to sign up to this and not have to worry about it for a while. However, fixed-rate mortgages can be pricier than the variable options, particularly when interest rates are so low. So be aware that by doing this you could pay more than you would with a variable-rate mortgage.
The choice is yours
The thing is, when you fix you’re paying for that peace of mind that your repayments won’t change until the fix ends. In your head, that might be money well-spent. But if you feel it’s a waste, a different mortgage might be more appealing to you.
Ultimately, only you can decide what suits your own circumstances best. But if you would like more information about the different mortgages available, we’re happy to help – click here for our guide.