Fixed rate mortgages offer borrowers the ability to help budget for household expenses more accurately because they have an interest rate that remains constant for an agreed portion of the overall term of the mortgage - typically between one and five years.
Unlike variable rate mortgages, the interest rate charged on fixed rate mortgages will not be influenced by changes in either the Bank of England Base Rate (BoEBR) or the lender’s Standard Variable Rate (SVR). Instead, the interest rate will remain constant during the fixed rate period regardless of movements in interest rates on other financial products.
The fixed interest period gives borrowers the stability they need to manage their household budget more effectively, which is why fixed rate mortgages are popular with first-time-buyers and young households.
Fixed rate mortgages are also popular during times of historically low interest rates. Many homeowners fix their interest rates while they believe the cost of borrowing is cheap, therefore locking in the low rates well into the future. However, while fixed rate mortgages provide borrowers with some advantages, there are also several disadvantages.
Fixed interest rates are usually slightly higher than current variable rates. Borrowers should therefore refrain from fixing their rate if they believe that interest rates will either remain stagnant or fall in the near future.
If a fixed interest rate is locked in for a period of time and the variable rate for the same mortgage product remains lower throughout that same period of time, the borrower will pay more interest on their mortgage than required.
Additionally, once the fixed rate period expires, the interest rate will convert to the lender’s Standard Variable Rate. It is therefore advisable for borrowers to assess their remortgage situation before the termination of the fixed rate period.
It is also important to note that most lenders charge an arrangement fee for their fixed rate mortgage products. Therefore, borrowers should assess whether the estimated future savings in interest that can be made by fixing the interest rate is not outweighed by any upfront arrangement or brokerage fees that must be paid.
Borrowers should therefore assess the overall expected cost savings in combination with the ability to manage their household budget more effectively, against any upfront fees that may be charged, before applying for fixed rate mortgages. If borrowers require help in deciding whether to fix their interest rate they should contact an independent mortgage advisor.
An independent mortgage broker can offer unbiased and impartial advice on the entire UK mortgage market. Because they are not tied to specific lenders and products they can find the most appropriate home loan products for their clients based solely on their clients’ needs. Experienced brokers should be able to advise their clients whether they believe interest rates are historically low and the environment is therefore right for locking in a fixed interest rate.
Independent mortgage brokers and financial advisors should also be able to assess their clients’ individual financial circumstances and recommend whether fixed rate mortgage are appropriate based on this.
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