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Fixed Rate Mortgages

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Fixed Rate Mortgages

A fixed rate mortgage is one which the interest rate is guaranteed to remain constant for a defined length of time. This can provide comfort since, unlike a variable-rate mortgage (such as a discount or tracker), you will know precisely how much you will pay back each month throughout this time

The following topics are covered below:

What is a fixed rate mortgages?

A fixed rate mortgage is one which the interest rate is guaranteed to remain constant for a defined length of time. This can provide comfort since, unlike a variable-rate mortgage (such as a discount or tracker), you will know precisely how much you will pay back each month throughout this time

A fixed rate mortgage is a house loan with a set interest rate for a set period. Fixed-rate mortgages are typically for two, five, or ten years. This means that irrespective of changes in the Bank of England base rate, your monthly repayments will remain constant during that time. Variable rate mortgages provide less financial protection than fixed rate mortgages. However, you can arrange your budget more easily because you know your monthly repayments will always be the same. Fixed mortgages are often slightly more expensive than variable discount or tracker mortgages.

It would help if you examined the overall cost of the mortgage over the entire fixed period to locate the cheapest fixed rate mortgage. If a mortgage has the lowest interest rate but a high set-up charge, it may not be the most cost-effective alternative.

The biggest disadvantage of a two-year fixed-rate mortgage is that the low fixed rate only lasts for two years. After two years, you will be shifted to the lender’s SVR, which might range from 3.5 percent to 5%, depending on current market conditions. This might have a significant impact on your mortgage payments each month. To avoid this, shop around for a new mortgage package around 2 to 3 months before your fixed rate term ends.

You can remortgage and move to a new lender if your present lender offers you another fixed rate contract. However, keep in mind that most mortgages come with set-up expenses. For example, a booking or arrangement cost £1,000 is standard, as are additional fees for a valuation or survey.

 

How long can a interest rate be fixed for?

Your mortgage rate can be fixed for one, two, three, five, seven, ten, or fifteen years; however, one-year and 15-year fixes are uncommon. The longer your fixed-rate period lasts, the greater the interest rate will be in general. This is because it is more difficult for a lender to forecast what will happen in the market over a longer period, so you are essentially paying for the assurance that your rate won’t go up regardless of what happens in the market. Also, a fixed-rate mortgage’s term is the maximum amount of time you must repay it, whereas an adjustable-rate mortgage’s term is the maximum amount of time you have to repay it; you can also choose to put a substantial amount towards the principal to reduce the length of time it takes to refund the loan. Just make sure there is no prepayment penalty on your loan (most do not) and that the extra payments are going toward the principal.

Is it better to have a 2 year fixed rate or a 5 year fixed rate plan?

The shortest-term fixed rate home loan available in the UK is a two-year fixed rate mortgage. A 2-year fixed rate mortgage, as the name implies, gives you a fixed interest rate for two years, after which it reverts to your lender’s usual variable rate (SVR). You may get some of the greatest interest rates on the market with a two-year fixed rate mortgage. In December 2020, interest rates started at 1.09 percent for individuals with a 40% deposit (60 percent LTV), or around 1.76 percent if you have a 20% deposit (80 percent LTV). The key advantage of two-year fixed rates is that they guarantee that your interest rate will not vary during the next two years, even if your lender’s typical variable rate changes or the Bank of England raises the base rate, which is now at 0.10 percent. The greatest two-year fixed-rate mortgage does not always have the lowest interest rate available. However, for a few extra pounds a month over the lowest variable rate mortgage, you can be certain that your interest rate will not rise even if the Bank of England raises the base rate. Remember that the best offers are usually only available to individuals who have a large deposit, such as over 40%, so it is crucial to do your homework on the rates you will be offered.

A five-year fixed mortgage has a fixed interest rate for the loan duration. So even if the Bank of England raises the base interest rate or your lender raises its normal variable rate, your monthly mortgage repayments will not change during this time (SVR).

A 5-year fixed mortgage provides you with many financial certainties, but it comes at a price. Even the finest 5-year fixed rate mortgages have a higher interest rate than a two- or three-year fixed rate mortgage, resulting in larger monthly payments.

It is possible that you will end up spending hundreds of pounds extra in interest over five years than you would with a two-year fixed rate mortgage. The best 5-year fixed mortgage is one that will save you the most money over five years. Always consider the interest rate and the set-up expenses when comparing 5-year mortgages to find the best deal. You may also need to figure in valuation, conveyance, and home survey fees if you are remortgaging or switching mortgages.

If you are not an expert in the field, deciding which fixed rate mortgage to get in the UK in 2019 takes a lot of consideration. The following are the important points to consider when contemplating a 2, 3, or 5-year fixed rate mortgage:

  • What is the mortgage interest rates for a 2, 3, or 5-year fixed rate mortgage?
  • What is the state of your finances?
  • Do you prefer to know your expenses over a longer period, such as five years?
  • Are you willing to take a small financial risk?
  • Is it more significant to have lower outgoings today than to have higher outgoings in two years?
  • What does the Bank of England’s interest rate outlook look like?
  • Is it likely that interest rates will begin to rise soon?
  • Is it true that mortgage interest rates are still at historically low levels?
  • How probable is it that your situation will change?

While you will answer many of the questions, you will not answer all of them. This is where a knowledgeable mortgage advisor can assist you. Even if you think you do not like ambiguity, a discussion with an advisor may reveal that you do not mind taking a slight risk and that a 2- or 3-year fixed rate mortgage would be more suitable for you.

They can also assist you in considering your unique circumstances in respect to your mortgage. For example, if you plan to change professions careers, have a baby, or marry, all these factors will influence how long a fixed rate mortgage is appropriate for you.

 

What are the fees on a fixed rate mortgage?

Your fixed-rate mortgage’s fees will be determined by several factors, which are:

  • The size of your house loan evaluates the basis of how much you borrow.
  • The interest rate you pay and the length of your mortgage (e.g., 25years)
  • Whether you have a repayment or interest-only mortgage.
  • Any upfront costs associated with a fixed rate contract,

If you are purchasing a new home, you will likely have additional expenditures such as a deposit, legal fees, and any stamp duty you’ll have to pay. Take, for example.

£150,000 repayment mortgages taken over 25years

The higher the rate, the longer the fixed agreement, as the lender assumes more risk of interest rates fluctuating while guaranteeing your rate. But, of course, this rate-hike protection, like any other insurance policy, will cost you money.

While a five-year fixed deal would typically have a higher rate than a two-year fixed term, the average rate gap between the two has been reducing in recent years. As a result, five-year fixes have risen in popularity as borrowers seek to take advantage of lower rates.

What are the early repayment charges like?

An early repayment charge (ERC) is a fee charged by your lender if you pay off your mortgage earlier than planned or pay it off more than the lender allows at a particular time. A tie-in time is common in many deals, and it is longer than the deal period. For example, if you try to remortgage a two-year fixed rate mortgage within three years, you may be charged an ERC. Unless you are ready to pay the fee, you may have to stay on the lender’s standard variable rate (SVR) for at least a year.

If you are ready to pay the ERC, you may be able to pay it upfront or include it in your new mortgage if you are remortgaging. However, keep in mind that you will have to pay interest on the ERC after that. If your mortgage has an ERC associated with it, your mortgage illustration will show you how much it would cost. If you need to quit your fixed-rate mortgage before the end of the fixed term (for example, selling your home or transferring to a cheaper package), you will certainly be fined an Early Repayment Charge (ERC). An Early Repayment Charge is usually calculated as a percentage of the outstanding mortgage and ranges from 1% to 5%. Although 1% may not appear to be a significant penalty, it can add up quickly if your outstanding sum is large (for example, 1% on a £200,000 loan is £2,000). When it comes to big high-street lenders like NatWest, Nationwide, Halifax, HSBC, and Lloyds Bank, the percentage can sometimes decrease the longer you have had your arrangement.

What are the overpayments like?

Check with your creditor to know if you can overpay your mortgage without incurring penalties and if there are any limits on how much you can overpay.

There is usually no limit to how much you can overpay your mortgage if you are on your lender’s ordinary variable rate or a tracker mortgage. On the other hand, fixed rate mortgages usually have an annual overpayment maximum of 10% of your total outstanding mortgage balance.

Because each lender’s technique for calculating this 10% varies, use our calculator as a suggestion only and talk to your creditor to figure out precisely how much you can overspend.

Also, be sure that any extra money goes toward paying down the debt (shortening the period) rather than lowering your monthly payments. This calculator assumes you want to pay down your mortgage debt, which is the major advantage of paying extra. With a fixed rate mortgage, your capacity to make overpayments is limited. In addition, early repayment charges (ERCs) may apply if you overpay by a significant amount, wiping out a portion of the savings you were hoping to make.

Differences between fixed and variable rate mortgages?

Fixed-rate mortgages have a significant advantage in that they provide predictability. You know exactly how much your monthly mortgage payment will be for a defined length of time, making budgeting much easier. In addition, there are no unpleasant shocks in store.

Fixed-rate mortgages have traditionally been more expensive than variable-rate mortgages since you pay for peace of mind. However, this is not necessarily the case these days, with many fixed rates appearing to be affordable.

The longer the fixed rate period, and thus the longer you have confidence about the number of your mortgage payments, the higher your interest rate will be.

That is not to say you will not be able to discover a lower variable rate in the future. If you do, you will get smaller instalments from the start, which will make things more manageable. However, there are many risks because it is quite easy for your rate to start speeding quickly, making it more difficult to stay up with. However, if the base rate falls, your rates, and repayments may decrease.

Another thing to intentionally think about is whether there is a penalty for paying off the loan early (ERC). You will be charged this cost if you choose to switch mortgages or return it in part or in full during the initial fixed or variable period. It can easily go into the thousands because it is calculated as a percentage of your outstanding debt.

Some variable mortgages, on the other hand, do not charge ERCs. In that situation, you can at least switch to a fixed-rate mortgage if interest rates start to rise, and you’re worried about being able to afford the payments in the future. That way, you can have some peace of mind about your payments without having to pay thousands of pounds for the right of repaying and switching. It can also come in handy if you wish to make hefty overpayments or pay off your debt sooner.

Conclusively, it is important to note that your specific scenario will determine whether a fixed, discount, or tracker mortgage is better for you. The primary distinction is that fixed rates stay the same for the full introductory deal time or “fixed term.” In contrast, typical discount and tracker rate mortgages move immediately following the Bank of England base rate and are above or below it by a defined margin for the entire introductory deal period.

Dany Williams

Dany Williams

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Dany Williams
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