Battle of the Mortgages: Round 1
As a first-time home owner, or even if you’ve been on the property ladder for a while and are looking to re-mortgage, deciding which kind of mortgage to go for can be a bit of a headache. The most popular types include fixed-rate mortgages and tracker mortgages. Here, we will look into fixed-rate mortgages, discussing the advantages, disadvantages and things to consider when contemplating this kind of mortgage.
A mortgage is a legal agreement in which a bank or a building society lends money at interest in exchange for owning the property until the buyer has paid the loan off in its entirety, upon which the property is then owned completely by the buyer. Mortgages are a great way for people to begin to pay for their own home and get into the property market. They are usually paid in monthly repayments to the lender, with fixed-rate mortgages being one type of this.
With a fixed rate mortgage mortgage, the debtor will pay their monthly repayments at a rate that is fixed at the same cost for a period between one year to ten years, but usually comes at two, three or five year deals (moneysupermarket.com, 2018). The interest rate set by the lender will also stay the same across this fixed term. The fixed term is usually referred to as the incentive period by the lender (moneysavingexpert.com, 2018). When this period comes to an end, the rate will then return to the lender’s standard variable rate – the loan will come a SVR mortgage – which will more than likely ensure that the monthly payments increase in cost compared to the fixed rates.
Advantages of Fixed-Rate Mortgages
There are many advantages to fixed-rate mortgages, which is why they are often popular for first-time buyers and re-mortgages alike, especially during times of economic unrest. The monthly mortgage repayments will remain the same for the entirety of the fixed period, meaning even if outside interest rates increase (such as the Bank of England’s base rate), your agreement will not increase. This can help with monthly budgeting, as you will know exactly how much you need to pay for your mortgage each month, and this will not change for the agreed amount of time. Hence, fixed-rate mortgages are great for tight budgets, such as first-time buyers or those who like to plan their monthly outgoings in advance.
The flexible time-scale of the fixed-rate period can allow singles, couples and families to take advantage of this scheme. If you’re planning to move home in the next couple of years, for example if your family outgrows your current location, then taking out a two or three-year loan would be advisable. If you’re happy where you are and plan to stay there in the long run, then committing to a longer fixed-rate could work for you. That said, as long as your mortgage is “portable”, there is no reason that your current mortgage deal is not transferred to your new property.
Fixed-rate mortgages will typically let you make overpayments too, which are generally up to 10% of the outstanding balance per year. This way, if you happen to come into some money, you can pay your mortgage off quicker, even if the rate is fixed.
Disadvantages of Fixed-Rate Mortgages
If the Bank of England’s base rate falls, due to the permanent nature of the mortgage you would not see your repayments decline in cost. This is why it is important to question what will happen to the base rate before signing up for your mortgage. It is also another reason why two-year periods can be most favoured.
As well as this, most fixed-rate mortgage lenders will charge a large fee if you want to exit the deal before the end of the fixed term. This is known as an early repayment charge (ERC) and again adds to the appeal for many of the shorter period deals.
Once the fixed-term had ended, the mortgage will become an SVR mortgage. The standard variable rate for your mortgage can increase dependent on the whim of the lender. It is essential that up to six months before the end of the fixed-term, research is undertaken to find the best mortgage deals available as this can give great amounts of money. Re-mortgaging to another fixed-term deal could be the best option. 63% of those committing to a fixed-rate mortgage are aiming to re-mortgage.
It is also key to remember that the size of your deposit will help with the kind of deals you could receive. The best fixed-deals are often given to those who have 40% or above of the asking price as a deposit. This is not likely for a first-time buyer but could be possible for those looking to re-mortgage.
Fixed-rate mortgages are advantageous for those with a tighter budget, or those looking to re-mortgage their property. For some, the stability of having the same monthly payment for a long-term is appealing. However, they do not often offer the best interest rates or repayment deals. Two or three-year terms are the most popular, as longer periods tend to become more expensive and money can be saved if you review your mortgage repayments every couple of years. It is critical to keep the Bank of England’s base rate in mind, as well as the cost of SVR mortgages and how much deposit you can afford.
Different fixed-term mortgage deals can be compared online. Researching and planning are essential to ensuring you get the best agreement – no one wants to be paying more than they should.