Brief Guide to Fixed Rate Mortgages

There is a certain amount of peace-of-mind offered by a fixed rate mortgage, but the same financial package can provide one or two shocks as well.

Borrowers can be assured that for a certain length of time – usually one, two, three, five or ten years - their mortgage repayments will be the same every month and they will be protected from interest rate fluctuations.

Even if interest rates soar, you will continue to pay at the lower rate of interest, agreed with your mortgage lender. Of course, if rates drop, then you are stuck with making relatively high monthly repayments. This frequently happens - which is why fixed rate mortgages are something of a gamble.

But they are also useful if you are a homebuyer on a strict budget because you can plan your spending for years in advance and you are not threatened by having to stretch your finances to breaking point if interest rates escalate. This feature of fixed rate mortgages is why they are popular with first-time buyers unused to the up-and-down nature of the mortgages market.

Fixed rate mortgages anticipate interest rate movements, and they are an excellent choice when the Bank of England base rate – which lenders use for setting their mortgage rates - is low. For example, in 2003, during which time interest rates bottomed out at 3.5%, the Britannia Building Society was offering a fixed rate deal for just 3.24%.

It’s important to check the small print on fixed rate deals. You may be charged a sizeable ‘arrangement fee’ (probably several hundred pounds) by your lender for setting up the mortgage.

It’s also essential to find a deal that doesn’t tie you in to the lender’s standard variable interest rate (SVR) for a period once the cheaper fixed rate ends. This is a common practice. Lenders’ SVRs are often uncompetitive and can be a costly addition to your mortgage. Beware ‘headline’ fixed rate deals that seem too good to be true – they probably are.

Longer-term fixed rate mortgages – up to 25 years - tend to be based on rates that are higher than the lender’s SVR.

Lenders will sometimes offer low long-term rates, but such deals are usually only available for short periods. So, if you spot one you like, you’d be wise to act fast.

Another problem with short-term fixed rate mortgages is what is known as ‘rate shock’. This is particularly galling for borrowers who secure themselves good deals.

When your fixed rate term comes to an end, you will begin to make repayments at your lender’s SVR, which is more likely to be higher – and could be almost twice as much as your previous rate.

Your lender is unlikely to remind you that your fixed rate term is coming to an end and your repayments are about to jump considerably. The first thing you know about it could be when you see your bank statement. If you choose to complain, you may be offered a better rate, but not one that is market-leading.

To avoid higher repayments, look for a new mortgage deal before the end of your fixed rate deal. For more information on remortgaging, see the UK Net Guide feature on remortgaging.