With a fixed rate
mortgage the monthly repayment amount is fixed for
a chosen period. The fixed rate remains the same
irrespective of changes to the lender's standard
variable rate or the Bank of England's base rate.
The fixed rate
period usually lasts for between two and five years,
however, it can be longer. At the end of the fixed
rate period the interest rate reverts to the lender's
standard variable rate. An early redemption penalty
will apply should you wish to cancel your mortgage
before the end of the fixed period.
Furthermore, many
fixed rate mortgages tie you in for longer periods.
This is because an early redemption penalty is charged
if you cancel your mortgage within a set number of
years following the end of the fixed rate period.
So no matter what happens to
the base rate, your monthly repayments will stay
the same for the duration of the initial deal. These
are rarely the cheapest mortgages on the market but
there are a range of attractive products offering
affordable stability. Current low interest rates
have also narrowed the gap between fixed and discounted
rates in an exceptional way.
INTEREST
RATES
With a variable-rate
mortgage, your payments go up or down according to
the Bank of England base rate. If interest rates
go increase, fixed-rate customers have the safety
of knowing their payments wont 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 term lasts. Even if interest rates do stay
level, you're still likely to pav slightly over the
odds because fixed rates tend to be offered at a
higher initial rate than variable ones. This is a
for the peace of mind a fixed rate gives you.
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COSTS
The price of a
fixed rate depends on the amount you need to borrow
and the length of time you fix for. As a rule the
bigger your deposit or equity in your home, the lower
the rate will be. The initial fix can vary greatly
from six months to 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.
Two and three-year fixes are most popular.
It's important
not to fix for longer than you think you will able
to - 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 large 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 lender's standard variable rate (SVR). You
can't remortgage to a more suitable one without incurring
ERCs. The tie-in period can last for several years
and cause a leap in your monthly repayments. Low
initial rates often have longer tie-in periods so
research carefully.
LONG-TERM
FIXES
With such low
rates, it is tempting to fix for a long time and
people with large financial commitments who are likely
to be on a budget for several years could benefit
from fixing for 10 years or more. Extremely long-term
fixes aren't that popular with either lenders or
borrowers. Security tends to come at the cost of
flexibility. When deciding how long to fix for you
should consider that not only could the Bank of England
rate vary but personal circumstances may also change
over the next 10 or 15 years. It makes sense to choose
a fixed rate when you think rates are likely to rise.
USEFUL INFORMATION
•
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
•
Worthwhile if you think interest rates will increase
•
Good for first-time buyers and anyone on a budget
•
Interest rates are usually less competitive than
for other mortgages
•
You could be tied into an unfavourably high SVR once
the fixed period finishes
•
Early redemption charges can be high should you want
to change your mortgage before the initial period
is over
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