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Fixed Rate Mortgage

The market for fixed rate mortgages is highly competitive. Many banks & building societies will offer very attractive fixed rates of interest in an attempt to attract borrowers to remortgage from their existing lenders.

The concept of a fixed rate mortgage is simple – no matter what happens to the bank base rate, your monthly repayments remain the same for the duration of the initial deal. This will of course include protection against interest rate increases during that period.

There are of course other considerations that the prospective borrower must take into account:

- The borrower cannot take advantage of any reductions in the lender’s standard variable rate during the fixed rate period.

- An arrangement fee is usually made payable at the time of application. This will differ depending on the lender but can range from £200 - £600

- An early repayment charge (ERC) is applied to most fixed rate products. The early repayment charge will be exercised if the loan is either partly or fully redeemed during the fixed rate period. This penalty may be calculated as either a fixed percentage of the amount redeemed, or, so many months interest on the amount redeemed

It is not usually the case for an early repayment charge to apply beyond the end of the fixed rate period. These ‘overhand’ penalties are rarely found these days, although they do exist within fixed rate products.

The reason for the early repayment charge is simply to deter borrowers from redeeming the fixed rate mortgage to take advantage of a cheaper interest rate with another lender.

In considering a fixed rate mortgage it is important to consider the length of time that you would be committing to. If you were planning a house move in the near future then you would need to ensure that the mortgage was portable.

It is also important to bear in mind the possibility that interest rates will rise during the fixed rate period resulting in a substantial increase in monthly repayments when that period ends.

Fixed rate mortgages may suit first time buyers especially and anyone on a budget. They could also be worthwhile if it is believed that interest rates will go up.