Fixed Rate Mortgages Explained

With a fixed rate mortgage the interest rate applied to the loan remains the same for the whole of the period of the agreed term. This is normally between six months and five years. Some lender have recently started to offer 6 years.

Depending on the lenders “terms and conditions” limited (usually small) lump sum repayments may be made without any penalty. This mortgage type however will have what is called a “break cost” if large amounts are repaid, or, if the loan is fully repaid before the expiry date. These are penalties that the lender will charge. Details of these will be included as a “formula” in the mortgage agreement.

Normally the lender will notify their client when the fixed term is about to expire. This gives the client the ability to negotiate a new fixed term. If this is not been negotiated, the mortgage will revert to the current variable rate.

Benefits:

  • A fixed rate enables a client know exactly how much each repayment will be over the term.

  • If and when there is a trend or predicted forecast that the market interest rates are rising. It enables the client to “lock” their interest rates with a fixed rate.

  • It is often possible to establish a fixed rate at a lower than the variable rate.

Limitations:

  • The “terms and conditions” of fixed rate mortgages have penalties if exceeding limits on how much a client can increase repayments or make lump sum payments.

  • It is possible that the market rates maybe lower than the fixed rate.

  • Their ‘break fees’ can be expensive if a client wishes to sell their home or repay the mortgage if they move to a different lender.

For mortgages, refinancing and risk insurance