What is a fixed-rate mortgage? We give you the facts about fixing
Posted 16 October 2015 by Keith Osborne
In recent years, the majority of mortgage borrowers have chosen a fixed-rate mortgage. Figures from a leading mortgage broker revealed that around 94% of all purchase mortgages were taken on a fixed rate in the summer of 2015 with 90% or remortgage clients choosing a fixed-rate product.
So why are fixed-rate mortgages so popular? Our guide explains how fixed-rate mortgages work and we explain the pros and cons.
What is a fixed-rate mortgage?
A fixed-rate mortgage guarantees that your mortgage payment won't change for a set period. Fixed rates are typically for two to five years, although in recent years longer-term fixed rates – up to 10 years – have become more popular.
When you take a fixed-rate mortgage your repayments will not change for the period you fix your home loan for. Even if interest rates change during that period you will always pay the same amount.
Fixed-rate mortgages - the pros
The main advantage of a fixed-rate mortgage is that it gives you the peace of mind of knowing exactly what your mortgage payments will be for a fixed period.
David Carmichael from Glasgow-based mortgage broker Taylor Carmichael says: "Once you have fixed your payments for a number of years, you benefit from knowing exactly what your mortgage payments will be.
"This allows you to budget and to plan your finances with more certainty, safe in the knowledge that your mortgage payments won't change. It also helps you to protect yourself against rising interest rates as you know your payments will stay the same irrespective of what happens to the Bank of England base rate."
Fixed-rate mortgages - the cons
While the idea of guaranteeing your mortgage payments for a set period may be compelling, there are downsides to taking out a fixed-rate mortgage.
One factor to take into consideration is that you may end up paying more for the benefit of a fixed rate. Variable mortgages sometimes offer lower interest rates and you can pay a premium for the security of a fixed rate.
In addition, while a fixed rate protects you from a rise in your payments if interest rates go up, you could also end up paying more if interest rates were to fall.
One other major consideration when taking out a fixed-rate mortgage is that they generally come with an 'early repayment charge'. This is a charge you have to pay if you decide to end your mortgage within the fixed-rate period - for example if you decide to remortgage or sell your home.
Carmichael adds: "The charges for coming out of a fixed-rate early can run into thousands of pounds and so it's important that you are prepared to commit to a fixed rate if that is what you choose.
"Most lenders will allow you to transfer a fixed rate onto a new property if you move home within the fixed period . However, this can restrict your choice and any additional borrowing you need may have to be on a different product."