Mortgage types in detail

Fixed rate mortgages

Mortgage types in detail

Bewildered by Buy to Let? Flummoxed by fixed rates? In a spin over shared ownership? We’ll explain what all these different mortgage terms mean so you can set your thinking straight.

Fixed rate mortgages

Fixed rate mortgages are some of the most popular mortgages available, and it’s easy to see why. This mortgage does exactly what it says on the tin: it guarantees that your interest rate won’t go up or down for a certain number of years, essentially giving you extra peace of mind.

The length of your fixed rate mortgage period

Many lenders will let you choose how long your interest rate is fixed for, and most people go for two or five years.

It’s natural to think that a longer fixed rate term is better as you’ll get that peace of mind for longer, but don’t make any decisions yet! In general, the longer your interest rate is fixed for, the higher the lender will set that rate. They can’t be certain what will happen to the market in the future, and it isn’t viable for them to have everyone on a long term, low fixed rate when national interest rates could shoot up, hence the higher rate.

Essentially it’s up to you whether the higher rate is worth it or not.

What happens when the fixed rate period’s over?

Who said all good things come to an end? When the fixed rate period finishes you can shop around and remortgage to a new deal, either with the same lender or a different one. If you don’t, you’ll automatically be put on the same lender’s standard variable rate, which is unlikely to be the best option. Shopping around and switching deals isn’t cheating – almost everyone does it. It’s just good financial sense! 

Your new mortgage can usually be arranged up to six months before the fixed rate term ends, ensuring a smooth and easy transition. Talk to your broker ahead of your deadline to make sure you’re switching to a good deal.

Pros of a fixed rate mortgage

  • There are no nasty surprises with a fixed rate mortgage. You know exactly what you’re going to pay every year until the fixed term comes to an end, which means it’s far easier to budget.
  • If your lender’s standard variable rate shoots up you’ve made a saving, because your interest rate is still fixed.

Cons of a fixed rate mortgage

  • While it can sometimes lead to savings if the standard variable rate (SVR) shoots up, fixed rates tend to be set higher. Basically, you pay more in exchange for certainty.
  • When your fixed rate period comes to an end your lender will usually put you on their standard variable rate deal. It’s unlikely to be the best one you can get, so be prepared to shop around when your fixed term is over.
  • If you want to repay a large chunk (or all) your mortgage early, while you’re still in the fixed rate period, you’ll probably be charged for it. Typically lenders will allow up  to 10% overpayment without penalty, but check your specific deal as they’re not all the same.

If a fixed rate mortgage doesn’t sound like the right choice for you, you might want to think about variable rate mortgages instead.

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