Fixed Rate Mortgages
With a fixed rate mortgage, the rate of interest is fixed for a certain length of time - normally 1-5 years however, there are lenders who will offer some very long term fixed rates, such as ten years or even for the life of the mortgage term.
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Whatever the fixed rate period (whether it be one year, ten years or the life of the mortgage) this means that your monthly mortgage repayment will not change within the fixed rate period, whether interest rates go up (or down).
Therefore, a fixed rate mortgage may be suitable for you if you are on a tight budget and need certainty about your financial outgoings. With a fixed rate mortgage, you don’t have to worry about your monthly repayment amount increasing, even if the base rate (which is set by the Bank of England and is used by loan providers to set their interest rates) goes up.
This means that if you are on a fixed rate mortgage and interest rates increase while you are in the fixed rate period, then you will save money in real terms too!
This is because you will still be paying a set monthly repayment amount while your contemporaries on a standard variable rate or another type of mortgage will have to pay more.
Of course, the downside is that the base rate may drop, meaning lenders will probably lower their interest rates too, and you could be paying more every month than you have to. However, you will still know how much money will be coming out of your bank account each month, and that in itself is a benefit.
Once your fixed rate period has ended, then your mortgage will usually revert to a standard variable type. At this stage it may be worth looking around for other good deals in the market place. However, do check first with your current loan provider that you will not be charged any financial penalties (also known as ‘redemption’ penalties) should you decide to change to another, better deal with someone else.
Most mortgages will charge you redemption penalties should you move your mortgage to another provider during a set period of time. This is because the mortgage marketplace is extremely competitive and lenders will try to retain you as a customer for as long as possible.
By adding an early redemption penalty clause (ERC) to your agreement, you are tied to the provider for a certain period. Eg. if you decide to repay your mortgage or move to another lender within the specified period, you could face huge financial penalties.
Therefore, make sure you check small print for any redemption clause as switching mortgage products and providers may cost you more in the long run.
