Fixed Rate Mortgage
With interest rates rising higher and higher in the recent months, first time buyers are looking at fixed rate mortgages as a safer option.
A fixed rate mortgage is a mortgage where the amount you repay the lender each month can be at a specific period in time and isn’t affected if interest rates rise or fall within the market place. The payment remains the same through the term of the loan, as opposed to mortgages where the interest rate may adjust. On a fixed rate mortgage, rates are generally fixed for a period of 2 to 5 years, but shorter or longer periods are also sometimes offered. At the end of the fixed rate period, the rate will then convert to the Standard Variable Rate (SVR). Payments on fixed rate mortgages are calculated using three values – compounding frequency on the interest rate, amount of the loan, and the term of the mortgage.
Generally, fixed rate mortgages are the most popular mortgages opted for in the UK. In January, 2007 for example, 72 per cent acquired this type of loan – an increase of three per cent from the month before. Many people are opting for a fixed rate mortgage as it enables them to plan ahead, and protects them from possible risk.
However there are a couple of disadvantages. Mortgage lenders will generally charge up-front fees on a fixed rate mortgage, and often will also apply an Early Repayment Charge (ERC), making a heavy charge for borrowers wishing to pay off their fixed rate mortgage early. The duration before you will be required to pay an Early Repayment Charge will depend on the terms of the fixed rate mortgage deal you have chosen. Also, due to the interest rate risk to the lender, fixed rate mortgages can often be more expensive than adjustable mortgages. As a potential borrower, a decision should be made on the basis of the loan term, the current interest rate, and the possibility of the rate increasing or decreasing during the duration of the mortgage.