Most mortgages are lent over the medium to long term (15 - 30 years) and over that time period the cost of borrowing set by the banks and/or the Bank of England usually varies. A mortgage where the initial interest rate might have been 4 - 5% might slowly (or suddenly!) become 6 - 7 % (or more - or less). In the 1980s, mortgage rates in the UK sky rocketed into the mid teens, leaving many with huge mortgage repayments and a real headache.
As the name suggest, a ‘fixed rate mortgage’ is a mortgage that has an agreed rate of interest fixed at the start of the loan. It won’t vary in line with the Bank of England Lending Rate, LIBOR or the mortgage company’s Standard Variable Rate (SVR) for the fixed rate period.
A fixed rate mortgage offers certainty to the borrower and can be attractive to those borrowers on tight budgets or in jobs with no prospect of significant growth in salary in the foreseeable future. They are also worth considering when interest rates are historically low, although the downside is that you could pay a higher initial rate on a fixed rate mortgage than you would on a variable rate.
Most borrowers interested in a fixed rate product will take an initial fix in interest rates of between one and five years, with the loan then reverting to the lender’s SVR or a rate linked to LIBOR or the Bank of England Base Lending Rate.
It is worth noting that fixing a rate also means that if mortgage rates fall, you are still paying the original (higher) rate. For this reason some people will seek out capped rate mortgages, which will generally protect you against rate rises but still allow the rate to fall with the market.
Whatever you decide, it’s best you choose a product that best suits your needs at the time and for the foreseeable future.
For more information contact us or speak to an adviser on 01628 507477.
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