A fixed rate mortgage, as the name suggests, is one in which the rate of interest paid, on the original capital sum borrowed, remains fixed for a certain period of time. This means that, regardless of any fluctuation in the Bank of England Base Rate – up or down – mortgage repayments remain constant for that fixed period. This type of mortgage can be useful for, for example, first-time buyers, or, indeed, anyone for whom a mortgage commitment represents a substantial portion of their income, where the benefit of knowing, in advance, the level of mortgage repayment outweighs any potential advantage to be gained from a fall in interest rates.
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The early repayments of a fixed rate mortgage, in common with a variable rate mortgage, are composed of a larger interest element, and a smaller capital element. During the term of the mortgage, the outstanding capital is gradually reduced, along with the interest due on that capital, such that later repayments are composed of a larger capital element, and a smaller interest element. A fixed rate mortgage, however, does provide a certain amount of security, and peace of mind, with fixed monthly repayments, not – unlike income – subject to inflation, and, therefore, the prospect of reducing the proportion of income required to meet a mortgage commitment.
The choice of fixed rate mortgage product depends, obviously, on the products available at the time, and, more critically, the total capital sum – and its relation to the total value of a property – and the length of time for which you wish to fix the interest rate. Interest rates can be fixed, typically, for 2, 3, 5, or 7 years, although mortgage products with a fixed rate term of 10, or, perhaps, even 25 years are available. These latter, long term fixed rates are, again rather obviously, better suited to borrowers who intend to live in their property for a lengthy period, and prefer the security of constant, known, monthly repayments.
Many mortgage lenders offer certain incentives for first-time buyers, such as the absence of arrangement fees, refund of a valuation fee, or “cash back”, upon completion of a mortgage. When assessing the relative merits of individual mortgage products, you are likely to come across the abbreviations, “LTV” (“Loan to Value”), and “APR” (“Annual Percentage Rate”). LTV, usually expressed as a percentage, is the ratio between the total amount that you wish to borrow, and the total value of the property you wish to purchase. As a very simple example, if you wish to borrow £135,000 against a property valued at £150,000 – that is, you are able to supply a deposit of £15,000 – LTV is calculated as 135,000/150,000 x 100 = 90%. You may well find that the availability of mortgage products requiring an LTV of up to 90% is higher, the longer the fixed rate term, and that shorter term fixed rate mortgages require an LTV of between 90% and 97%, as a general rule. APR, on the other hand, is the rate of interest that you pay, as a whole, on a mortgage product, and takes in to account the initial, and any subsequent, interest rates, any product fees, or charges, and the length of the mortgage term. APR is a useful figure to know, and understand, when comparing mortgage products.
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Fixed Rate Mortgage Considerations
If you are considering a fixed rate mortgage, be aware that, generally speaking, a booking, or arrangement, fee is payable. In many cases, this fee can be added to the total sum borrowed, but interest charges will also be applied to this additional amount. Fees are generally inversely proportional to the interest rate of a particular mortgage product – the lower the interest rate, the higher the fee, and vice versa – so beware of high mortgage fees obscured by an apparently attractive APR. In some cases, higher interest rate products may have no product fee at all, and fees may depend on whether you are a new, or existing, customer of the lender concerned, and whether you are purchasing your first, or a subsequent property.
Bear in mind, too, that early redemption, or repayment charges – often equivalent to several months’ interest – may apply, for at least the duration of the fixed term, and sometimes beyond, depending on the mortgage lender. This can be particularly important in the case of long term fixed rate mortgages, where it is more difficult to predict whether a change in circumstances may lead to the necessity of early repayment.
If interest rates fall significantly during a fixed rate period, a fixed rate mortgage may actually prove to be more expensive than a variable rate mortgage, and, alternatively, if interest rates rise during the period, you may experience a substantial increase in the level of monthly repayments, when the interest rate reverts to the standard variable rate, at the end of the period. It is wise, therefore, to review your mortgage product with your mortgage lender, mortgage broker, or Independent Financial Advisor (IFA), well in advance of the end of a fixed rate period, so that you can decide on your best option at that time – whether it be a more competitive product from your current lender, or elsewhere.
Mortgage lenders, nowadays, are legally bound to provide details of the total cost of a mortgage, fixed rate, or otherwise – including any additional fees and charges – in plain, simple English, in the form of a “key facts” document, which must be issued to, and approved by, potential customers, before a mortgage application is completed.
As with any other financial, or mortgage, product, if you are in any doubt as to whether a fixed rate mortgage is most appropriate to your own, individual circumstances, or not, you should obtain unbiased, professional advice, from a properly qualified IFA.
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