The primary attraction of
fixed rate mortgage deals is that they offer a guaranteed set monthly repayment for a specified period of time, regardless of changes in the lender’s SVR.
Fixed rate mortgages are popular with:
- Budget-conscious people who like to know exactly how much money will be exiting their bank account on a monthly basis
- Those expecting interest rates to rise
With a fixed rate mortgage, the interest rate is fixed at a certain percent level for a set period (e.g. between two and 10 years, though sometimes as long as the mortgage term). When the ‘fix’ ends, repayments usually revert to the lender’s Standard Variable Rate (SVR) for the remainder of the mortgage term.
The gamble with fixed rate deals is that interest rates could drop after you’ve signed up, and it’s possible that your lender’s SVR could sink below your fixed rate – as happened for many homeowners when the Bank of England cut its base rate to a historic low of 0.5% in March 2009. On the other hand, if rates rise significantly after signing up, you could save money on what you’d otherwise be paying if you were on a variable rate mortgage.
Fixed rate mortgages usually come with an arrangement fee, which will offset some of the gains you could make over the period of the fix. However, there have been mortgage deals that pay this for you as an incentive to buy their product.
Also, many fixed rate deals contain an Early Repayment Charge (ERC), which could see you paying an early redemption penalty for switching your mortgage to a better deal.
Next - Part 10: Capped Rate Mortgages
