Fixed rate mortgage deals are commonly used by both first time and existing homeowners in the UK. Many like to have the guarantees given by fixing interest rates, especially in the early years of paying off their mortgages. How does this kind of deal work and what are the advantages and disadvantages?
What is a Fixed Rate Mortgage Deal?
Some mortgages work on a variable payment basis. This means that the monthly repayment on the loan can go up or down depending on market conditions. A fixed rate deal, on the other hand, locks in a payment rate for a period of time. So, for example, a homeowner that takes out a two year deal will make the same mortgage repayment every month until the deal ends, no matter what happens in the market.
In the UK fixed rate offers tend to last for a set number of years. There will generally be an arrangement/booking fee payable to access the deal although this can often be rolled into the overall loan if preferred. Deciding to change deals before they end may also incur early repayment penalties.
What are the Advantages of Using a Fixed Rate Mortgage Offer?
These kinds of deals can be used by both first time buyers and existing mortgage holders looking for a new product. There are various benefits, including:
- Repayments with a fixed rate deal will be the same for a set period of time. This may suit those on tight budgets or those that like to know exactly how much their mortgage payment will be every month.
- Increases in underlying bank base rates will not affect the homeowner's repayment if they have a fixed deal which could potentially save them money if rates go up.
- Homeowners will get the chance to lock into a lower rate deal than the lender's Standard Variable Rate (SVR).
Before choosing this mortgage option, however, it is also worth considering the downsides.
What are the Disadvantages of Fixed Rate Mortgages?
Although these kinds of mortgage deals suit many homeowners, they may not work as well for others. Some of the possible downsides include:
- Fixed rate deals may be more expensive than variable offers.
- A decrease in bank rates could see homeowners left with higher monthly repayments than if they had a variable product.
- There will be a fee to pay in most cases and penalties may be charged if a homeowner wants to end a deal early or change it.
Making a choice between a fixed rate deal and a variable option may come down to the preferences of the homeowner and their predictions for what will happen to the mortgage market during the term of an offer. These mortgages often work well when rates are low enough to make future increases likely and not so well if rates look likely to drop.
First time buyers and those with limited mortgage experience may want to learn more about alternative deals before locking into an offer. Calculators that can assess and compare repayment costs across various loan types may also be useful, as may online mortgage comparison sites which can help find best buy fixed rate deals.
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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