Fixed rate mortgages are one of the simplest mortgages on the market, but it’s always worth learning exactly how they work and what you need to know about them before you make an application. Take a look at the advice below to find out everything you need to know about fixed rate mortgages.
What is a Fixed Rate Mortgage?
Fixed rate mortgages are actually fairly simple – the interest rate on your mortgage will stay the same or remain fixed for a certain period of time. This means that your mortgage repayments will be the same each month. Some fixed rate mortgages last for two years, some for five years and some for much longer. Generally, once the fixed rate period has ended, the mortgage lender will usually transfer your mortgage to a standard variable rate mortgage. The interest on standard variable rate mortgages varies from between 2 to 5% above the base rate, depending on lender.
Benefits of a Fixed Rate Mortgage
Fixed price mortgages will give you a huge amount of peace of mind – you’ll know that your rate won’t rise, even if the bank base rate rises or if the lender’s standard variable rate rises. This will not only help you to budget, as you’ll know exactly what your outgoings will be each month but it will also save you money if bank rates do rise. If your budget is small and if you need to know exactly how much you’ll be spending, a fixed rate mortgage is definitely the choice for you.
Drawbacks of a Fixed Rate Mortgage
Fixed rate mortgages often have a fairly pricey arrangement fee, meaning that you need to save more money than you usually would in order to set the mortgage up. This could be up to $5000. This does make a fixed rate mortgage quite an expensive option, despite the peace of mind that it may bring. Additional prices will also occur if you decide to repay the mortgage back early, during the fixed rate period, or if you want to remortgage the property during this period. These fees can be very expensive.
If the bank base rates go down during the fixed price period, you could well end up paying much more in interest. Equally, the standard variable rate mortgage might be much more expensive that the fixed rate mortgage, so when you switch to an SVR from an FR, your payments could make a huge jump. However, the fixed rate period should also give you some opportunity to save money for when the mortgage switches to a standard variable rate.
What to Do at the End of a Fixed Rate Mortgage
If you want to switch, or if the SVR mortgage is too expensive for you to move on to, start looking at alternate mortgage lenders around six months before the end of your fixed rate period. That way, you can set the wheels in motion for switching your mortgage to ensure that you get the best price possible.
Find out everything you need to know about standard variable mortgages and more by taking a look at our posts over the next month.