fixed rate mortgages

Fixed Rate Mortgages

a simplified guide

In mortgage terms this could be described as a safe bet. A fixed rate mortgage fixes the interest rate that you pay for the period stated. If the central bank increases interest rates then your monthly repayment amount is unaffected. In other words it provides you with the certainty that you know exactly how much your mortgage will cost you each month.

If you have a view that interest rates might rise over the next few years then going for a fixed rate loan may be a good option. However there is a price to pay for the certainty of a fixed rate. Generally the interest rate of a fixed rate mortgage will be slightly higher than a tracker loan. The difference between the two rates can be thought of as the "premium" that you pay for the certainty of constant interest rates.

Fixed rate mortgages can run over a term of anything fro 3 to as much as 50 years. As a rule the longer the fixed period, the higher the interest rate that you'll have to pay each month. Also fixed rate deals often have stiffer redemption penalties. This means that if you want to switch to a different loan before your fix period expires you will be charged a penalty fee to do so.

Whether in the long run a fixed rate loan saves you money (this will happen if interest rates rise during the term of the loan) or costs you more money (this will occur if interest rates fall during the term of your loan) one thing that it will provide you with is consistency. There will be no nasty surprises of increasing monthly repayments should interest rates rise sharply.