Can a fixed rate mortgage work for you?
Why is it that things that should seem so straightforward can be so difficult? A fixed rate mortgage can fall into this category… While they seem easy to understand at first look, it can be worth your time to brush up on how they work and whether it’s worth your time (and money) to consider getting one.
As we’re sure many of you are aware, a mortgage is essentially a loan that you take from a mortgage lender (usually a bank or a building society) to pay for a property or piece of land over an extended period of time. Though as we’re also sure you’re aware, very sadly, money isn’t free. This means that when you are paying back the money that you’ve borrowed, this will be at a rate of interest. This will vary between different lenders so it’s important for you, as a borrower, to shop around and get a deal which is right for you. A fixed rate mortgage is a popular choice amongst borrowers, especially if you’re a First Time Buyer. But, why?
You might be left with many questions as to the ‘why’. Along with other burning questions like 'what mortgage should I go for?' 'Is there any more I need to know?' Well, this article will explain to you what a fixed mortgage is and why it may be the best option for you. Let’s get into it.
What is a fixed rate mortgage?
A fixed rate mortgage means that the interest rate will not change for the introductory period of time you agree to contract to with the lender. While this is may seem fantastic, and in the short term, it is, until after the fixed period ends. Then you’ll be moved onto an SVR (Standard Variable Rate) Mortgage, but we’ll get to that. The rate is unlikely to be fixed for the entire duration of the mortgage and instead aimed around the time period of 2-7 years. So, it’s a good offer, until the incentive period ends – however, that’s what remortgaging is for (but again, we'll get to that).
This can be a great option for First Time Buyers. These mortgages currently often have rates around the 2-3% mark, making your monthly payments ‘fixed’. Giving you the opportunity to get your feet on the ground after their big money move!
What is there to gain?
As previously stated, what fixed mortgage rates can do is protect you from ever changing bank interest rates. While this clearly will provide with financial stability and consistency early on into your move, it will also prevent you from any sudden needs to re-mortgage due to a high-interest rate being unexpectedly thrust upon you. It is, however, important to remember that due to you being fixed in, although your monthly payments won't increase during the introductory period, they won't decrease if interest rates drop either.
What we would argue is that you should look at the fixed rate your bank is offering and decide for yourself whether it would be worth securing this as a future safety net should the property market kick up a storm. And think how you’ll feel! Having to pay a small amount extra may seem like a measly fee knowing that you can sleep easy at night without worrying about being hit by an ‘interest rate lightning bolt’. In an ever-changing economy, with rising and falling interest rates, being on a ‘fixed’ rate can work in your favour.
Life after your fixed rate mortgage…
While things might not be quite so cheery when your introductory period ends, it’s by no means the end of the world. As fixed rate mortgages are only for a fixed period of time, once this has finished you will automatically be moved onto your lender’s standard variable rate (SVR). This rate forms a base rate set by the lender.
This can cost you dearly as it is likely that it will be higher than your fixed mortgage rate. Even an increase of 1% can end up costing you hundreds of pounds per year. Having said that, there is some possibility that the SVR rate you go onto is lower than the fixed rate you have been paying, though as we’ve covered, this won’t come with the same security that a fixed rate does.
While we’re sure you might be panicking as you read this, don’t be alarmed. If the SVR is higher than what you were currently paying, there are ways around it. Which means… time to start researching and get yourself ‘re-mortgaged’! The best thing to do is start checking when your introductory mortgage rate is going to expire and then also what your lender’s SVR is. This can help you plan ahead and go some way to preventing any financial anxiety. After all, preparation is key!
It’s important to bear in mind when you’re doing your research that if the SVR is higher than your current mortgage rate, then it may be worth re-mortgaging. This could alternatively offer you a better deal with your current lender or a more lucrative option elsewhere. This could be a good option for you.
If you’re looking to find a better deal on your mortgage, consider remortgaging. At Mortgages Online, we can help you save money through changing your fixed rate mortgage after your incentive period ends! Start your new mortgage search, right here!