Looking for the cheapest fixed rate mortgage may not be as easy as you would think, taking into account fees, rates and how long you should fix for. Speaking to a financial adviser before taking a fixed rate mortgage offer is worth a call, is inflation rising or likely to fall, should you put a larger deposit down are just some of the questions you may want answering.
What is a fixed rate mortgage?
A fixed rate mortgage is a type of mortgage which guarantees that the interest rate will remain the same for a fixed period of time.
This can offer you peace of mind as you know exactly what your mortgage repayments will be throughout that period, as they are guaranteed to remain the same. This is different to tracker or standard variable rate mortgages, in which interest rates can go up or down throughout the term.
How long can you fix the interest rate on the mortgage for?
Currently, you are able to fix your mortgage for one, two, three, five, seven or 10 years. Usually, the longer you want to fix your mortgage for, the higher the interest rate is going to be. Essentially, this is because the mortgage provider cannot be certain what will happen to interest rates in the future and so you pay more to ensure that your interest rate will not go up, regardless of what happens in the market.
How long should I fix my mortgage for?
There is no definitive answer to this question, unfortunately. The amount of time you want to fix your mortgage for should take the following points into consideration:
Personal circumstances: what the best option for you is not necessarily the best option for someone else. You should think about how long you plan on keeping the mortgage for, because if you plan on moving in the near future, you may want to fix for less time. This is because there is usually an exit charge if you want to sell your home within the fixed period. You should also consider whether you are happy to pay a higher interest rate for a longer fixed term to give you the security of knowing what your monthly repayments will be.
Economic climate: there is currently a lot of uncertainty in the economy and inflation is at a high. As a result, interest rates have already risen this year. Given this, you may want to fix your mortgage now, so that you know what your repayments will not change if rates rise further. However, in times when inflation is low, interest rates tend to lower too. This is the risk you take when fixing your mortgage, as interest rates may fall below what rate you have fixed your mortgage at. It is a good idea to weigh up what you think might happen in the economy over the term you intend on fixing for.
Attitude to risk: after considering both of the above points, you may wish to take a gamble a fix for less time. Alternatively, you may be more comfortable knowing what your repayments will be for an extended period of time and fix for longer. How you choose to manage the risk of either benefiting from a competitive interest rate or potentially paying more than those on a variable or lower fixed rate is unique to you.
Our mortgage advisers at Woodward Financials are well prepared to help you consider and find answers to these questions, allowing you to take comfort in your decision.
What happens when the fixed rate ends?
At the end of your fixed rate mortgage period, your lender will transfer your mortgage to their standard variable rate (SVR). The SVR is set by the lender and can go up or down at any time.
What other types of mortgages are there?
A tracker mortgage is a type of mortgage where the interest rate you pay is linked to an external rate, usually the Bank of England base rate. The lender also adds on a set percentage on top. The Bank of England Base rate is reviewed eight times a year, so a tracker mortgage has the potential to change eight times per year, although this is very unlikely.
Most lenders that offer tracker mortgage apply a collar, which is the minimum rate you will pay, regardless of what the Bank of England base rate does.
Standard Variable Rate (SVR) mortgage
If you have had a fixed rate mortgage and you are at the end of the fixed term, this is the type of mortgage that yours will turn in to. The interest rate on a SVR mortgage can be increased or decreased by the lender at any time and doesn’t necessarily follow the Bank of England base rate changes. Usually, if you have a SVR mortgage, it is a good idea to look at remortgaging to a better deal.
Discount rate mortgage
This type of mortgage is essentially like a SVR mortgage, but the lender applies a discount for a set period of time, usually around two years or so. If, for example, your lender offers a 1.5% discount, your interest rate will be 1.5% lower than the lender’s SVR. However, it will still increase and decrease in line with the SVR.
A capped rate mortgage is a variable rate mortgage which has a fixed upper rate limit known as the cap.
Things to consider before taking a fixed rate mortgage
Purchasing a home will be one of the most expensive things you will ever buy and so you want to make sure that you select the right mortgage for you. Even small differences in interest rates can save thousands of pounds over the long term.
Woodward Financials were awarded best wealth management firm in 2021 and again in 2022 we have a team of mortgage advisers ready to help you answer these questions and guide you through the right mortgage for you.
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