Advantages and Disadvantages of Fixed Rate Mortgages
2008 December 29
These only came into the main stream with the liberating of the wholesale money markets when lenders such as banks and building could buy massive amounts of funds primarily from the London Interbank money market. This could be done at a fixed rate therefore they could pass the savings on to customers making a tidy profit in between.
The rate is fixed for the initial period of the loan. Typically people fix the rates for 1 - 5 years although some mortgages exists where you can fix them for the full term of the mortgage up to 25 years.
After the initial fixed rate the product goes back to the standard variable rate.
There may be a booking fee or arrangement fee. This will be paid for by the borrower.
| Advantages | Disadvantages |
| No increase in payments when interest rates increase. | No Benefit from falling rates if rates drop. |
| Allows you to budget for future expenditure. | Usually lenders have large arrangement fees and early redemption charges. |
| No nasty shocks down the road. | Reverts to normal variable rate after fixed rate period ends which may cause shock. |
Who are fixed rate mortgages most suitable for ?
- Anybody who wants the security of knowing that the payment wont increase for a number of years.
- People on a tight budget.
When is the best time for a fixed rate mortgage ?
- If the economy and mortgage market looks unstable and interest rates look like they will rise fixing your mortgage rate might be a good idea. Unfortunately nobody can forecast the interest rates with certainty.
- Another time to fix your rate might be for a first time buyer just getting on the property ladder. This person may get a special fixed rate deal that is hard to turn down.
What to watch for ?
- Look out for high arrangement fees.
- Early redemption charges within the fixed rate period.
- Longer early redemption charges that overhang outside the fixed rate period. These are now rare but still do exist.
- Ensure you can afford the mortgage after the fixed rate ends as interest rates might have increased.
- Check to see if the mortgage is portable i.e. can you move house with the same mortgage without any additional fees.
