Fixed rate mortgages: What you need to know
Despite the Bank of England Base Rate remaining unchanged for the past six years, fresh predictions from commentators and economists about when it might rise have continued unabated.
With rates at their lowest level in history, it seems that when they do eventually change, itâs likely to be in an upward direction.
But when it comes to arranging your mortgage, you shouldnât let predictions about the future of interest rates dominate your decision-making. Fixed rate mortgages can offer protection from rate rises for an agreed period â but there are several considerations youâll need to think about before making your decision.
Predictable repayments â but you wonât benefit from rate cuts
When choosing a mortgage, one of the main decisions to make is whether to go for a âtrackerâ or a âfixed rateâ mortgage.
With a tracker mortgage, your monthly payment fluctuates in line with a rate thatâs equal to, higher, or lower than a chosen Base Rate (usually the Bank of England Base Rate). The rate charged on the mortgage âtracksâ that rate, usually for a set period of two to three years.
Tracker rates might be more appealing if you have a fixed budget and can tolerate a higher mortgage payment when rates rise, as you’ll benefit from a reduced monthly mortgage payment if rates go down.
With a fixed rate mortgage, the rate (and therefore your repayments) will stay the same for an agreed period. A fixed rate mortgage makes budgeting much easier because your payments will not change – even if interest rates go up. However, it also means you wonât benefit if rates go down.
Longer fixed terms will be more expensive
If you choose a fixed rate mortgage, youâll need to decide how long you want your fixed rate to last. Two-year fixed rate mortgages typically offer the lowest initial interest rate. If you want to fix your interest rate for longer, you will probably pay more for that longer-term security. The term you choose will depend on your current circumstances and future expectations.
A change in circumstances could cost you
Do you have any known changes on the horizon that will have an impact on your mortgage?
With a fixed rate mortgage, there is usually an early repayment charge if you repay all – or a certain percentage – of the mortgage during the fixed-rate period. If for example, you know that in 18 months time your employment contract is up for renewal and you may be asked to relocate, youâd probably want to avoid being tied into a longer deal.
If you have no known changes and want to benefit from a longer period of security, then a longer-term fixed rate of five years may appeal. It might cost more initially, but youâll benefit from knowing that your repayments will stay the same for that length of time.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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