How does one go about wading through the host of fixed rate mortgages offered in the UK market? Well, first of all, one should know what fixed rate mortgages are.
Fixed Rate Mortgage Definition
Fixed rate mortgages are a type of mortgage where the interest rate charged by the lender is fixed for a certain period of time. For example, you might be able to secure a mortgage which you need to pay back within 5 years. Under a fixed rate, the interest for that mortgage will be fixed at the same level throughout the 5 year fixed rate mortgage payment period. The advantage is that your interest payments will not fluctuate even if the Bank of England adjusts its interest rate within that 5-year payment period.The disadvantage of a fixed rate mortgage is that if the Bank of England lowers its interest rate, you do not qualify for lower interest payments. People who choose variable rate mortgages will enjoy lower interest payments if the Bank of England lowers its interest rate.
Who Qualifies for a Fixed Rate Mortgage?
Fixed rate mortgages are available to people who desire financial stability during the payment period of their loan. It is helpful for people who are on a fixed income or low income because a fixed rate mortgage allows these borrowers to stay within their budget. Young couples who are just starting out in their careers and do not have huge incomes yet will find fixed interest rates to be suitable for their circumstances because they will be able to plan their budget months in advance due to the fact that their mortgage payments will not change.
How do Fixed Rates Compare to Other Types?
Lenders in the UK differ with the level of the fixed interest rate they charge for their fixed rate mortgages. However, a rule of thumb is that the fixed interest rate will be a bit higher than the base rate. The fixed rate mortgage may become a variable rate mortgage after the fixed rate period has been completed, linked to the lender's standard variable rate. You may also opt to keep your fixed rate mortgage fixed for the next payment period. If you decide to do it that way, the new fixed rate might be changed or adjusted depending on what the base rate is when the interest rate is being recalculated.
Can I Terminate a Fixed Rate Mortgage Early?
Being able to terminate a fixed rate mortgage early will depend on the agreement you signed with your lender. Generally, yes, you may opt to terminate the fixed rate agreement prior to completing the fixed rate payment period. However, you may be asked to pay penalties if you do so.Some people deliberately choose short fixed rate periods because they anticipate that the market rate will fall sometime during or after they have completed the fixed rate payments. That would be a good way to avoid penalties, if you know how to gauge the market.
Other Fees to Watch Out For
An early redemption penalty is charged if you decide to pay off your mortgage early. There are mortgage lenders who may also charge you a redemption penalty due to the extended tie-in stipulation. This means even if you succeeded in paying for your discounted mortgage, you will still have to pay the redemption penalty that is equivalent to a percentage of the outstanding mortgage amount.The rule when it comes to calculating the impact of fees is: the smaller your mortgage amount, the stronger the effect fees will be on the total amount you have to pay.
What is payment shock?
Payment shock is the shock that homeowners experience when they have completed lighter mortgage payments then find that the new mortgage payments are much heavier than expected. Mortgage fees (even for fixed rate mortgages) have risen in tandem with the interest rate of the Bank of England, so be prepared to shoulder bigger mortgage fees when your fixed rate payment period has ended, since the standard variable rate mortgage that you take on is unlikely to be very competitive. You can prevent being afflicted with payment shock if you hedge your payments and plan ahead for potential increases in interest rates. You can also opt for a very long payment period under the fixed rate option, such as a 25-year fixed rate mortgage. The UK government is currently trying to promote long-term fixed rate mortgages to help homebuyers cope with the steep rise of UK housing prices. Another option would be to remortgage to a better deal at the end of your fixed rate period.
As you can see, fixed rate mortgages have their advantages and their pitfalls, so look carefully at the fine print of your fixed rate mortgage to know what you should expect.
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