Mortgage blog: The pros and cons of a fixed-rate mortgage
Research from a leading mortgage broker found that more than nine in ten home buyers in August took their mortgage on a fixed-rate basis. Fixed-rate deals have dominated the ‘best-buy' tables in recent months with record-breaking deals offering buyers rock-bottom interest rates.
But is a fixed rate always the best thing for you? While many people are attracted to fixed-rate mortgages by the security that they offer, they may not be the right thing for every borrower. So our guide looks at both the pros and cons of fixed-rate deals.
Stability and security - the advantages of a fixed rate
According to a leading broker, 91.2% of house buyers took a fixed rate in August 2013. With two-year products as low as 1.5% and five-year fixed rates at 2.5%, it's perhaps no surprise that borrowers have chosen to take advantage of these deals.
"The main advantage to a fixed-rate mortgage is that it gives you the security of knowing that your repayments won't rise for a specified period," says Keith Osborne, editor of WhatHouse.co.uk. "If you fix your mortgage for two or five years you know that's what you'll pay for that period. This is often of particular benefit to first-time buyers who are making a large financial commitment and want to make sure that they can afford their outgoings on an ongoing basis."
As well as offering the ability to budget, the current raft of fixed-rate deals also offer low repayments. With the base rate at a record low level, the only way interest rates can go is up, and fixed-rate mortgages protect you against rate rises.
Fees, penalties and commitment - the disadvantages of a fixed rate
Low repayments, the security of guaranteed payments and protection against rising interest rates. On the face of it, the reasons to choose a fixed-rate deal appear to be compelling - but there are downsides.
When looking at a fixed rate it's vitally important that you check the associated fees. Many of the ‘best-buy' deals have arrangement fees of over £1,000 and can negate any savings you make by choosing a low rate. A mortgage broker can weight up both your repayments and the fees to find the best overall deal.
In addition, fixed-rate mortgage deals invariably come with early repayment charges. This means that if you repay the mortgage before the fixed rate ends - if you sell your house or you want to remortgage - you will pay a penalty. These penalties can often be significant.
"Fixed rates will also restrict your choice if you come to move home," says Osborne. "If you're committed to a fixed rate your lender may let you transfer this onto a new property. But, if you need additional borrowing, you may have to choose a product from your existing lender which may not be the most competitive on the market."
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