If you’re considering taking out a fixed-rate mortgage, here are some more things to consider.
If the idea that your mortgage payment could change from month to month worries you, it’s worth giving fixes some serious thought.
The mortgage lender guarantees not to change your interest rate, and therefore your monthly payment, for an agreed period usually between one and five years, but it can be as long as ten or even 25 years.
(For more on long-term fixes, read Should I fix my mortgage for 25 years? and The dangers of a 25-year fix.)
A Sense of Security
The great advantage of this is the security it provides. You know that, no matter what happens to other people’s interest rates during that time, yours won’t alter.
So when you take out the mortgage, you can choose a loan size and a repayment amount you’re comfortable with and not have to worry that it will go up.
The Possible Costs
When interest rates are stable, market leading fixed-rate mortgages can offer competitive interest rates, but they do have potential downsides.
Falling interest rates
Even if interest rates generally fall, yours won’t, so you might end up paying more than you need to for months or even years.
And don’t assume you can simply walk away from the deal if it no longer suits you.
The fees for fixed-rate mortgages can be quite high compared to those on other types of deals.
When interest rates are rising and lots of people want to fix their payments, these deals often cost more to set up than discounted or tracker variable rate deals.
Also, if you want to pay off your mortgage during the fixed period, you’re likely to face a hefty early redemption penalty and when we say hefty, we mean several thousand pounds.
To prevent nasty surprises, it’s essential to check what fees might apply if you need to remortgage or sell during the fixed period before you sign up to a deal.
And never go for a loan that has penalties which extend beyond the fixed-rate period these are simply not worth having, as you will be stuck on your lender’s uncompetitive standard variable rate.
This used to be called an overhanging lock-in, but nowadays you’re more likely to hear it referred to as an extended redemption penalty or tie-in.