What is a Fixed Rate Mortgage?
A fixed rate mortgage simply means that the rate of interest is fixed for a certain period of time rather than a variable rate. The most common deals are for two or three year fixed rate terms although longer periods such as lifetime or 30 years are becoming more common place. Some of the cheapest mortages are for the shortest terms and perhaps for remortgages from your current provider.
Advantages and Disadvantages of a Fixed Mortgage
The main advantages of this type of mortgage is that you'll always know the rate of interest you are paying for the term of the loan that you have signed up for. If the Bank of England base rate increases and standard variable rates increase then your loan is guaranteed not to change so long as you are still under the fixed term of the plan.
Once the term for the fixed rates come to an end you'll normally be place on the the lenders standard variable rate SVR for the remainder of the term unless you decide to remortage to another product or another fixed rate. Of course every time your remortage to other products you'll have to pay arrangement fees so if these fees are £1,000 each time and you pay these every two years the fixed rate of interest may not be low enough to balance out the additional fees which is a disadvantage of remortgaging every couple of year.
Additionally, if you decided to switch out of these types of products during the fixed term there will likely be high switching costs which can be 2 or 3% of the
total loan or the amount outstanding and some providers also get you to pay back any discount against their SVR so read the terms and conditions of these products very carefully before commiting yourself.
What type of Fixed Rate Mortgages are Available?
Most fixed rate mortgages on the market at present are just for two or three years because the banks and building societies know that the next change in the BOE rate is for an increase so if you can get a competitive rate for longer than this period then this might be a good deal for your circumstances. Fixed rate mortgages are also available for buy to let landlords but the rates are generally higher.
Choosing The Right Fixed Mortgage
If you believe a fixed rate loan is the right product for your circumstances then there are still plenty of options on the market. You'll need to look at the total costs that will be incurred as most arrangement fees for these types of products are at least £1,000 just to get the mortgage and early redemption and exit penalties can be as high as 2% or 3% of the outstanding balance you have to repay as well as the benefit of the lower rate of interest.
These penalities may be for the life of the mortgage or within the first two or three years of having this type of fixed loan. So although the interest rate may be favourable if you need to pay off your loan or want to switch out to say a variable rate mortgage if BOE base rate suddenly increases then the costs of switching can be very high.