With a fixed rate mortgage, the clue is in the name: it offers a fixed interest rate for a set amount of time – two, three, four or five years, usually. This means your mortgage payments will be exactly the same each month, until the deal expires.
Fixed rate mortgages are among the most popular in the market. They are an excellent choice if your budget is tight and you need to budget carefully each month – which makes them a natural favourite for first time buyers. Fixed rate mortgages tend to become more popular during times of interest rate volatility: if you think you can see an interest rate hike on the horizon, fixing your mortgage rate now could save you money. The down side is that this works both ways: should rates drop, you would still be stuck on the same fixed rate.
As with any financial product, it’s crucial that you take a close look at all of the features before committing yourself – and your money – to anything. With fixed rate mortgages, the key features to look at are the length of the fixed rate term, any redemption penalties, and any mortgage fees.
Length
Before seriously considering any fixed rate mortgage, find out how long the fixed rate will last. If it’s a particularly competitive deal (for example, the rate is close to the current base rate) you may be best placed to take it for five years or even longer. But if you think interest rates are set to fall in the near future, a shorter deal may be a better choice.
Early Repayment Charges
You will also want to check if there are any Early Repayment Charges (ERCs) associated with the fixed rate deal you are considering.
Most mortgage lenders which offer a fixed rate for a set period enforce ERCs should you leave or pay off the mortgage before that set period is up. This penalty fee is normally a percentage of the outstanding mortgage, in many cases adding up to thousands of pounds, so it is usually a fairly effective deterrent to any would-be switchers.
Taking ERCS even further, some lenders also employ an extended tie-in period. If there is an extended tie-in on your mortgage, the ERC is payable even after the fixed rate deal ends. The rate usually increases at this point, which means you will be stuck with the same lender, paying a higher rate.
For this reason, our advice is to avoid any mortgage that comes with an extended tie-in.
Mortgage fees
Finally, take a look at any mortgage fees. These have been growing at a steady rate as lenders try to recoup the savings homeowners make when they switch mortgages. As fees don’t tend to vary in relation to the size of the home loan, a smaller loan will be more impacted by these fees than will a larger loan.
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