Fixed Rate Mortgages

Fixed rate mortgages allow new home owners to adjust to their financial obligations, set aside extra money and enjoy predictable monthly mortgage repayments. Fixed rate mortgages have their drawbacks; however, many borrowers appreciate having a set rate for the first few years of their loan. With more banks and building societies vying for your business in this competitive economy, you may see more lenders offering fixed rate mortgages to attract applicants.

When you're comparing mortgage options and applying for house loans, availing the most competitive interest rates is a major concern. Most mortgages are based on the Standard Variable Rate, or SVR, which is derived from the Bank of England, or BOE, base rate. Lenders have the option to adjust the SVR up or down within certain margins, which may vary from one bank to another. If the margins are too high, you may find that you have considerably higher monthly repayments than you anticipated when you signed your contract.

Fixed Rate Promotional Deals

Fixed rate mortgages are frequently offered as introductory promotional deals to draw business in a competitive market. With fixed rate deals, borrowers are given the incentive of paying an established amount of interest each month for the first few years of the contract. The promotional period generally lasts for 1 to 5 years. Some lenders may offer fixed rates that extend beyond 5 years. After this promotional period ends, the loan typically reverts to a variable scheme.

Many home buyers worry about future rises in their monthly repayments when they take out loans. It can be difficult to anticipate how high the BOE's base may rise. Even if rates have not fluctuated in some time, there is always the possibility that the economy may take a turn during the course of your mortgage. With mortgages lasting 25 years or more, a home owner can't predict how repayments may be affected.

The SVR works to the lender's advantage, because the lender may adjust rates to protect its own financial interests from the effects of the economy. Lenders may also decide to increase rates for certain mortgages if they feel that the applicant presents a higher level of risk. Fixed rate mortgages, on the other hand, are guaranteed to remain set for the agreed-upon time, which gives borrowers greater peace of mind in the first years of their loans.

Advantages of Fixed Rates

Fixed rate mortgages offer a number of benefits to borrowers, in addition to the sense of reassurance that comes with knowing that your repayments will remain stationary for an established period of time. When the BOE's base rises, your repayments will not increase. For the time being, you'll be sheltered from dramatic fluctuations in the market that could cause a significant hike in your mortgage payments.

Capped mortgages are similar, in that interest is guaranteed not to exceed a maximum limit. Like fixed rate mortgages, capped deals are generally offered as a promotional incentive and will often not exceed the first 5 years of the loan. Capped loans may also have a collar, which is the minimum amount of interest that you'll pay during the promotional period.

With discount mortgages, the interest is fixed at a lower baseline for a specified period of time. Discounts are very popular among borrowers because they can result in a significant savings. With the money you save, you can invest in improvements in your home or build an emergency fund for the future. Some borrowers elect to make higher repayments during the promotional period in order to shorten the life of the loan. Before you overpay, check with your lender about whether it imposes penalties for early repayment.

Drawbacks of Promotional Mortgages

Fixed rate mortgages may seem like a home owner's dream, until the BOE's base interest falls. At that point, you may actually lose money through these deals. Because you are contractually obligated to pay the established amount, you may have no recourse but to continue to pay a higher percentage until your loan reverts to the SVR.

Discharging a mortgage can be highly inconvenient, and escaping your contract won't be cheap. If you anticipate that you may lose money through a fixed rate scheme, look for a capped or variable deal, instead. With conventional variable loans, your payments will decrease when the BOE's base falls.

Purchasing a home is an important financial step, and your house will very likely be one of the largest investments you'll ever make. Before you commit to a 25-year contract, use a repayment calculator to estimate your monthly repayments. This simple step may save you from the financial consequences of borrowing more than you can afford. If you are fond of the idea of having predictable repayments for the first years of your contract, fixed rate mortgages may offer the security you seek.