Category: Mortgages

Mortgages

Is a Fixed Rate Mortgage a Sensible Idea?

There are lots of options for mortgages but many people choose a fixed rate because they think that they are the best. They are advantages and disadvantages of doing this and it is worth thinking hard about them all before you make up your mind which type of mortgage is right for you.

A fixed rate mortgage will have a certain amount of time being fixed at a specific interest rate. This will not be for the full term of the mortgage, but perhaps for between one and five years. It means that during this time period you will always have to pay the same amount of interest and therefore will be able to predict exactly what that payment will be. With a variable rate it will change when the base rate changes and possibly at other times as well. This means that you may find it being rather unpredictable and when payments go down, this is great but if they go up, you may find it hard to manage. When you first take out a mortgage you tend to borrow as much as you can afford and therefore you may be less likely to be able to afford any increases due to a rise in rates. Therefore having a fixed term at the beginning can be really useful and enable you to budget more easily and make sure that you manage your money well. You are likely to have some pay rises during the term of the mortgage and this will mean that once the fixed interest period ends, if the rate you have to pay goes up, you will be more likely to be able to afford it. This may not always be the case as well as there is the possibility that you may have less pay or that your expenses may have gone up, perhaps just to increasing prices or due to starting a family or other circumstances. It is worth noting that it is possible to swap mortgages and you may be able to change to another fixed rate mortgage should you want to. You may need to change lenders though and there could be an early redemption fee to pay, if you change lenders or if you change accounts within that particular lender.

Having a fixed rate can protect you against rate rises but if the rate falls then you could end up paying more than those on a variable rate. This could feel rather annoying and as you are normally tied into a fixed rate it will not be possible for you to change to a different account or there will be a very high penalty if you do. A fixed rate if often set above the variable rate so that if the rate does go up, the lender will not miss out on profits. This means that you could potentially end up paying more than you would compared to if you were on the variable rate. It is very hard to calculate which will be better though as even in the short term it is difficult to predict what the interest rates will be doing. If the rates are low, then you may think the only way for them is to rise and if they are high you may feel they are likely to fall. However, even looking back at past patterns, it is not easy to predict whether that will be the case. It is possible they may just remain the same for a long time or they may just change a little but there could be drastic increases or decreases as well. The longer the term, the harder it is to predict what might happen with the rate.

Whether you save money with a fixed rate is really down to luck. The odds are against you because a lender will set the rate based on their prediction of what will happen to the rates in the future and maximise their chances of making more profit. However, it may be in your advantage to know exactly what you will be paying each month and therefore be the right option for you. You may be prepared to take the risk of paying more money for the stability of knowing that you will know exactly what you will be paying each month.