Mortgage Guides

An introduction to fixed-rate mortgages

By Emma Lunn and Becca Talbot becca.talbot@consumerchoices.co.uk

With more than a million homeowners’ mortgage deals due to expire within the next twelve months, the question they are all being faced with is whether to switch to a fixed-rate mortgage or not (Updated 15/10/09).

As no one can ever be sure too what’s going to happen with interest rates, it’s often difficult to know which mortgage type will suit you best. At the moment the Bank of England base rate is at an all-time low of 0.5% and most experts don’t expect the rate to start going up until next spring. However, there is no guarantee it won’t rise before then.

Our guide introduces you to fixed rate mortgages, explaining how a fixed-rate deal works, what the advantages and disadvantages are, and offers advice on helping you choose the right option for you and your home.

• What is a fixed rate mortgage?
• The advantages of a fixed rate mortgage
• The disadvantages of a fixed rate mortgage
• The alternatives
• Our recommendation

What is a fixed rate mortgage?

A fixed rate mortgage has a fixed interest rate for a set amount of time (for example two, five or ten years), meaning the repayments you make on your loan will be the same from month to month, until the deal ends.

According to broker John Charcol (www.charcol.co.uk), fixed rate mortgages currently account for around 40% of mortgages being taken out. The figure has been nearer 70% in the past but the low base rate means more people are opting for variable rate or tracker mortgages at the moment.

Fixed rate mortgages are ideal for anyone who wants to know exactly what they’ll be spending on repayments each month and they are often the choice of first time buyers who are on limited budgets, or for young families who have to monitor their finances carefully.

There are three things to consider before opting for a fixed rate deal:

1. Length – You’ll need to think about the length of mortgage that will suit you best, and compare it against those on the market. Use your own judgement as to how long to go for – if it’s a particularly cheap deal you may want to jump on it, and choose a five year deal, or maybe longer.
2. Redemption penalties – Before leaving your current deal, you will need to check to see if there are any redemption penalties or exit fees tying you to it. Generally, when you’re on a special rate mortgage deal, there are penalties if you leave before the special rate deal is over. This is usually a percentage of the outstanding loan, so could equate to thousands of pounds.
3. Mortgage fees – Similarly to exit fees, there are often switching fees charged by your new mortgage provider. Lately these have been creeping up, in an attempt by providers to claw back some of the money homeowners are saving by switching mortgages. Normally, the smaller the mortgage, the more impact the fees will have on what you can save.

The advantages of a fixed rate mortgage

If you are someone who likes the security of knowing your repayments won’t change, or if you have stretched yourself to buy a property, then a fixed rate mortgage is probably the right kind of deal for you. Fixed rate deals have several advantages:

• You will know exactly what you’ll be paying from month to month and can budget accordingly.
• Knowing there are no nasty surprises around the corner will help you sleep at night, even when you read about rates sky-rocketing.
• If interest rates look a little shaky, and if you predict that they are going to rise in the near future, fixing your mortgage rate could save you money.

The disadvantages of a fixed rate mortgage

As with any mortgage, there are always downsides to taking out a new deal. Fixed rate mortgages are no exception. We’ve listed a few of them here:

• If you take out a succession of short fixed rate mortgages, you can only switch between deals without accruing any penalties when the current one has finished which may not be when the best deals happen to be on the market.
• There could be heavy penalties to pay if you pull out of your agreement early, if for example, you have a financial windfall and you want to pay off the rest of your outstanding loan.
• Fixed-rate deals are generally more expensive than variable-rate mortgages - you are paying a premium for protection against rate rises.

The alternatives

If you feel that a fixed rate mortgage is not right for you, your financial situation or your home, there are several alternatives that you could consider.

If you think that the base rate is going to remain stable or fall, then it may be wise to switch to a base rate tracker mortgage. This type of mortgage follows the Bank of England’s base rate and will fluctuate accordingly. However, if you take out a loan of this kind, if the base rate does start to rise you may end up paying more than someone on a fixed rate deal.

Our recommendation

Chris Eagle, commercial manager at CreditChoices.co.uk, reminds homeowners to, as with any mortgage, look at all aspects of the deal before taking it out.

He said: “It’s likely that interest rates will start to rise at some point next year so in many cases it might be advisable for borrowers to take out a fixed-rate now. If you wait for rates to rise until you fix then you’re likely to find fixed rates have got more expensive.

“If you take out a fixed rate deal for a longer period, maybe five or ten years, then check that your loan is portable and can be carried with you if you decide to move house.”

Chris also advises you seek professional help before securing your mortgage deal: “Whilst a broker cannot predict the financial future, they can give informed, expert opinion on the current market and help you look at the bigger picture when making that all important decision”

Use our mortgage calculator to work out how much you can afford to borrow, or compare mortgages now.

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