Fixed rate mortgage guide

by Cheyne Wilcocks MSc, DipPFS, Cert CII(MP & ER) | 30th December 2019 | Insight

Over the last decade with Bank of England base rate hovering around 1% fixed rate mortgages have become more and more popular both to the consumer and adviser alike. This is understandable, but there are things you need to be ware of before undertaking such a deal.

What is a fixed rate mortgage?

As the name suggests it is a mortgage that fixes your chargable interest rate for a fixed period of time. So, let's say you fix your chargable mortgage rate at 2% for 5 years through a deal offered through a mortgage provider. That means for 5 years the provider will not change your chargable interest rate regardless of what they set their variable interest rate at during the fixed rate period of 5 years. Put another way, your monthly mortgage repayment will not change for the fixed rate period.

What should you be aware of?

Arrangment fee or not to arrangement fee - The majority of lenders will offer very attractive headline fixed rates but on further inspection will expect you to pay an arrangment fee which can be quite high. These same lenders may well offer a slightly higher fixed rate but without the arrangement fee. You'll probably find yourself seduced by the lower fixed rate with arrangement fee especially when the lender offers the facility to add the arrangment fee to the loan. However, if the numbers are crunched you may well find taking the higher fixed rate without arrangement fee would prove to be more cost effective over the fixed rate period. This will depend on the size of your mortgage in relation to the amount of the charged arrangment fee. Also, adding the arrangment fee to the loan does need serious consideration in any instance.

So, what is the deal? - In return for fixing your interest rate the lender expects you to make your mortgage repayments for the entire fixed rate period. If you decide to repay your mortgage before the end of the fixed rate period the lender has the right, as set out in the mortgage offer document, to charge you a Early Repayment Charge (ERC). ERC's are high especially if you decide to repay the mortgage in the early years of the fixed rate period. A couple of things to bear in mind here, the majority of mortgages are portable, so if you decide to move home you can port the mortgage on to the new property without redeeming it. Also, the majority of lenders will allow up to 10% repayments of the capital in any one year before any Early Repayment Charge is triggered.

What happens at the end of the deal? - When the fixed rate period has come to an end your chargable interest rate will normally revert to the providers variable rate. What isn't quite so obvious is the impact this could have on your finances. If you fixed your rate for 5 years in that five years interest rates could climb considerably and result in a variable rate considerably higher than your finished fixed rate. This will mean your monthly repayments will be higher. You may well think ''ll just fix my rate again, right?'. Of course, this option will be open to you but the fixed rates may well be higher than you'd expect depending on the lenders view of future rate movements at that time. This is where a mortgage broker like Lawrie Mortgages becomes invaluable. Fixing your mortgage through us will mean months before your deal comes to an end we will contact you and start researching for the best deal for you to smoothly revert to at the end of your deal and also prepare you for likely new mortgage repayments.

To conclude

Fixing your mortgage rate can give you financial stability for a fixed period of time. But you must always be mindful of the fact that this deal is (normally) for a fixed period only. You need to prepare for what happens at the end of the deal and ensure the deal does not conflict with any future plans you may have.

Talk to us and let's see whether a fixed rate is for you and take advantage of our free review service. We will ensure you will be prepared for future changes and make sure you will be on the best deal available throughout the live of your mortgage.

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