Fixed-rate mortgages are mortgages that are offered at a "fixed-rate" of interest for a given period of time by the lender. This could be anything from two years up to 25 years. Most often they run for two, three or five years.
The good thing about fixed-rate mortgage is that the interest is fixed even if the Bank of England base rate or lenders' standard variable rate beings to climb. On the other side of the coin, however, if these rates plummet, the fixed-rate also remains the same and therefore a borrower could be paying a much higher rate than those on a variable product. On the whole, fixed-rate deals are among the most common and popular type of mortgage because they are reliable. Borrowers know where they are and therefore face fewer risks.
Who are Fixed-Rate Mortgages for?
Fixed-rate mortgages are extremely popular with first-time buyers. Their reliability means people moving onto the property ladder can budget confidently for the first few years. Also, they won't receive any shocks if the Bank of England decides to raise interest rates. Equally, anyone with a tight budget will find fixed rates the ideal choice. During times of continual interest rate movements fixed-rate deals make financial sense.
Pitfalls of Fixed-Rate Mortgages
The lack of flexibility is probably the main pitfall of a fixed-rate deal. Obviously, if interest rates are rising fixed-rates offer a safe haven for borrowers. However, when interest rates plummet, people on fixed-rates might find they are making larger repayments each month than those on tracker rates, which run in line with the Bank of England's base rate.
Some borrowers fall into the trap of finding an attractive fixed-rate deal and signing up only to find there is large administration fee to pay. Often the longer the fixed rate term the larger the administration fee is. Therefore it is good advice to check the administration fee before agreeing to anything.
Many fixed-rate deals also have redemption penalties. These are the fees which are charged if you pay off your mortgage, or leave the deal, before the term of the current agreement is up. The fee is usually a percentage of the remaining loan -most commonly between one per cent and three per cent - so can run into thousands of pounds. It is worth checking the terms of your mortgage deal before signing up for such a penalty, especially if you are locking into a long-term fixed deal.
Where to buy Fixed-Rate Mortgages
So common are fixed-rate mortgage deals that you will have no problems finding them by going direct to the lender - usually the main banks and building societies or specialist lending firms. The problem is finding the best fixed-rate deal which suits your needs. For this reason it is probably best to go to a mortgage broker, particularly a whole-of-market professional, who can scour the mortgage world for the best deal.