A Brief Introduction To Fixed Rate Mortgages

Fixed-Rate Mortgages

Fixed-rate mortgages are among the most popular on the market. They can be useful for first-time buyers, or anyone whose mortgage obligation represents a significant percentage of their earnings. The benefit of knowing the level of mortgage repayment is more important than any benefit gained from decreasing interest rates.

Loan to value

Loan to Value (LTV), usually expressed as a percentage, is the ratio between the total borrowing amount and the total value of the purchase property. As a simple example, borrowing £90,000 against a property valued at £100,000, assuming you are able to supply a deposit of £9,000; LTV is calculated as 90,000/100,000 x 100 = 90%.

Early Redemption Penalties

Early redemption or repayment charges, often equivalent to several months' interest may apply for at least the duration of the fixed term. Sometimes redemption penalties will extend beyond the fixed term, depending on the lender. This is important in the case of long-term mortgages, where the prediction of a change in circumstances, leading to early repayment, is difficult. Generally, the better the rate, the longer or higher the redemption penalties.

Pros and Cons of Different Types of Fixed Rate Products

There are two main types of long-term fixed rate mortgages: 25-year fixed rate. 10-year fixed rate. These are suited to borrowers who intend to live in their home for an extended period, and prefer the safety of invariable monthly repayments. Many mortgage lenders offer enticements for first-time buyers, such as no arrangement fees, reimbursement of valuation fees or "cash back", upon completion.

25-Year Fixed Rate Mortgage Traditionally, this has been the most popular mortgage when interest rates are low allowing a low interest rate to be secured for the full term.

Advantages : Lower monthly payments than a 10-year fixed rate mortgage Payments are constant for 25 years.

Disadvantages : Pay a higher interest rate than a 10-year fixed rate mortgage. Payments stay the same if base rate goes down.

10-Year Fixed Rate Mortgage This has been popular among people who are refinancing their 25-year loan.

Advantages : Lower interest rate than a 25-year fixed rate mortgage. Build up equity faster than with a 25-year loan. Payments are constant for 10 years.

Disadvantages : Higher monthly payment than a 25- year fixed rate mortgage. Payments stay the same if base rate goes down.

Key Considerations

Background

If you are considering a fixed rate mortgage, be aware that 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. Beware of high mortgage fees obscured by an apparently attractive APR.

Interest Rates

Interest repayment is the mortgage element that has the biggest impact on the borrower's monthly outgoings. The UK base rate is set by the Bank of England, subject to external factors, and unpredictability. When homebuyers borrow money, an obvious concern is the risk of unforeseen interest rate rises. It's a very real possibility, no matter how stable the economy.

Fixed Rate versus Variable Rate

Base rates are influenced by a variety of factors, and fall as well as rise. The possibility of a fall in the base rate often tempts consumers to favour a variable rate mortgage. If interest rates fall significantly during a fixed rate period, a fixed rate mortgage may prove to be more expensive than a variable rate mortgage. If interest rates rise during the fixed-rate period, you will experience substantial increases in repayments, when the interest reverts to the standard variable rate, at the end of that period.

Conclusion

Financial trends and recent economic history can give a clue to possible base rate fluctuations, but the result is only an educated guess. Predicting variations in the base rate is very difficult. However, fixed-rate mortgages aim to take interest rate movement into consideration, by setting a fixed interest rate for a predetermined period. They are very useful in some circumstances, as long as the underlying principle and ramifications of a variable base rate are properly understood.

Josh Taylor writes regularly on consumer, financial and business matters.

You can find impartial advice and further information on a fixed rate mortgage at http://www.1000mortgages.co.uk - where whole of market mortgage brokers do the searching for you.