Fixed rate mortgages may seem simple at first glance, but it's still worth brushing up on how they work, and the things to be aware of if you're considering one.
A fixed rate mortgage is simply a means of guaranteeing your mortgage payment over a set period.
Fixed rates are for an initial period, typically anything from a year to 10 years. After the fixed rate period ends, your mortgage will go onto a variable rate – normally a tracker rate or your lender's Standard Variable Rate - which won't give you the same kind of guarantee
During the fixed rate period your payment will remain the same, regardless of what variable mortgage interest rates do.
So, while you're protected if rates go up, you could also end up paying over the odds if interest rates fall during the fixed rate period.
Fixed rate mortgages also normally have an Early Repayment Charge if you want to remortgage or repay your mortgage in full during the initial fixed rate period.
That said, most fixed rate mortgages will allow you to make overpayments, typically up to 10% of the outstanding balance per year.
Up to six months before the end of your fixed rate period, start looking at the best mortgage deals available to see if you can save money. When your fixed rate ends you'll go onto your lender's Standard Variable Rate or a tracker rate. These don't offer the same payment security as a fixed rate, and, depending on the interest rate climate, could mean that your payment make a sudden jump.
On the flipside, it can sometimes be the case that the variable rate you go onto is lower than the fixed rate you've been paying. While this may come as a pleasant surprise, remember that if rates go up so will your repayments – you could end up paying a lot more than if you had remortgaged to another fixed rate. If you do decide to stay on a lower variable tracker or standard variable rate, consider keeping your monthly mortgage payment the same. This overpayment will reduce the term of your mortgage more quickly.
Alternatively, you can get the wheels in motion for a remortgage several months before your fixed rate period comes to an end. Then you can simply wait till the fixed rate period finishes (to avoid any Early Repayment Charges) and complete your remortgage to a new fixed rate.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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