Today's lesson: What is a Fixed Rate Mortgage?
The fixed rate mortgage is the most common type of mortgage in the UK. Although the housing market is always changing, and new types of mortgages emerge, the fixed rate mortgage seems to be the most popular method for financing or refinancing a UK property.
What is a Fixed Rate Mortgage?
A fixed rate mortgage is a loan in which the interest rate on the financial agreement does not change for a specified period of time. If the interest rate was set at 6%, for example, it will remain as such according to a predetermined timeframe set by your lender. A fixed rate mortgage is different in this aspect when compared to adjustable rate mortgages which, as the name suggests, has an interest rate that fluctuate according to the Bank of England’s Base Rate. In an adjustable rate mortgage, the amount you pay can, and will, vary as the Bank of England Base Rate adjusts up or down. With the fixed rate mortgage, any change by the Bank of England will not affect your mortgage.
The life of a fixed rate mortgage varies and many lenders and building societies such as Nationwide, are offering fixed rate terms as long as 25 years. Regardless of the term on the fixed rate mortgage or remortgage, the rate will remain the same according to your bank’s predetermined period; because of the predictable repayment schedule, fixed rate mortgages are typically sought after by the average home loan borrower.
Benefits of a Fixed Rate Mortgage
Aside from the non-adjustable interest rate, the fixed rate mortgage has several benefits. The payment amount on this type of mortgage is consistent: the principle on the loan, plus the interest, will always equal the same amount month after month. If you include the impound costs (the taxes and insurance coupled into the loan payment), your monthly amount could differ, as the impound items may not be fixed. However, the original loan repayment itself will remain the same, every billing cycle, throughout the fixed period of the particular mortgage.
A fixed rate mortgage also aides you in planning your finances or organising your budget. With a fixed repayment, you know what to expect month after month, and year after year. Knowing what to pay, and then paying it consistently on time, will help you to maintain a good credit rating and financial reputation with your lender. This in turn can benefit you in the future should you need to request additional funds from that mortgage lender, or any other financial lender. Knowing your expected monthly mortgage payment is also convenient for balancing personal finances, and you can utilise this information to financially plan for the future.
Remember when considering a fixed rate mortgage to research multiple mortgage offers prior to making a decision. A fixed rate mortgage may not be the option for you. You should also explore the available lending institutions as well, especially if you are a first time home buyer: there are a number of options available in the first time buyer mortgage area. This loan will be something you pay for the next 15 to 30, maybe even 40 or 50, years. Keep this in mind and do your homework before selecting a fixed rate mortgage. A financial advisor or qualified mortgage broker often times can provide you with a key facts illustration based on your personal circumstances for no fee, unless you decide to pursue a mortgage product through their services. However, this “free” advice may end up saving you a lot more than a broker’s fee when it comes time to making an informed decision toward your next, or first, mortgage selection.
Published on September 19, 2007
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