Fixed Rate Mortgages

What is a fixed Rate Mortgage ?

A fixed rate mortgage is a loan secured on property at a fixed rate for a fixed term. For example 4.99% fixed for 5 years

The term of a fixed rate mortgage can vary from (usually) 2 years, to (rarely) 25 years.

The rates offered will vary between lenders, within a small range of around 0.25% for similar mortgage products.

Fixed Rate Mortgages - The Advantages

The main advantage of a fixed rate mortgage is, as the name suggests, known certainty of mortgage payment. The real advantage is that you don't have to worry about interest rates rising (during your fixed rate term), increasing your monthly mortgage payments, and straining your cashflow. 

Fixed Rate Mortgages - The Disadvantages

• When selecting between a fixed rate and a discounted rate, the fixed rate will usually be higher, meaning a higher initial monthly cost
• Interest rates may fall during your fixed rate term, meaning that you will be paying more than if you had selected a discounted rate. The real problem here is that you now appear to have made the wrong choice, and regret having a fixed rate mortgage. You question your own judgement. Further, you will not be able to change your mind and get out of the deal without paying a penalty charge - often as high as 5% of the loan amount
• Rates may rise significantly during your fixed rate term. Whilst this is obviously an advantage to you DURING the fixed rate term, the vastly increased cost of the loan when the fixed rate ends, may be uncomfortable. It may be very uncomfortable.

How can you choose between a fixed rate and a discounted rate ?

Here are the circumstances in which you should definately choose a fixed rate mortgage -

• If you've utilised a higher income multiple to obtain your mortgage
• If you have a fixed low income which is unlikely to rise.
• If for any reason, you would worry about your mortgage payments rising 

What term should the fixed rate be ?

Now that you have decided that a fixed rate mortgage is right for you, what term of fixed rate should you choose? The choice will usually be between a two year, three year, or five year fixed rate, with the rate payable increasing, with the longer terms.

Here's my advice. In the current interest rate climate, mortgage rates have been reasonably stable for the last five years. If you need the security of a fixed rate, I can see little point in taking a two year fix (unless, your income will rise significantly in 2 years). Why?, well if rates do start rising, say six months after your mortgage starts, and keep rising for the next twelve months, you going to become increasingly worried. That defeats the object of choosing a fixed rate in the first place.

So go for a minimum of three, or preferably a five year fixed rate. Interest rates can't go a lot further down, so it's unlikely you'll regret the decision, but there's an awful lot of upwards potential, even if that's not likely either.     

If you are not worried about interest rates rising, then a discounted rate, or tracker may be best for you.