Happy Birthday to the Fixed Rate Mortgage

25-Feb-2010

Originally introduced in the late eighties, the fixed rate mortgage has recently celebrated 21 years in the mortgage marketplace.  Back in 1989, when there were a mere 12 fixed rate mortgage products on the market, the average UK house price was 68,933GBP and the average earnings stood at 12,678GBP, according to UK lender Halifax.  

Since then, fixed rate mortgage products have come to dominate the UK market, with a total of 68% of UK mortgage lending based on fixed rate products in 2009, according to figures from the Council of Mortgage Lenders.  We take a look at the fixed rate mortgage, and why it may be a suitable product for you.

What is a Fixed Rate Mortgage?

A fixed rate mortgage is a mortgage product that offers an introductory rate of interest for a fixed number of years, before the loan interest reverts to the lender's standard variable rate (SVR).  If you take out a fixed rate mortgage, you are tied into the mortgage contract for the duration of the fixed rate, and are charged a fee for changing products.  However, once this initial period has ended you are free to remortgage to another product or another provider.  

You can get a Fixed Rate mortgage for almost any length of time from 1 - 30 years.  Usually you'll find that the longer your fixed rate period, the better the interest rate on the loan will be.  This is because it is in the lender's interests to keep you tied into a Fixed Rate mortgage for as long as possible, to stop you from going elsewhere.  

Click here to request a callback from an experienced fixed rate mortgage adviser.

What are the alternatives to a Fixed Rate Mortgage?

If you did not want to fix your mortgage rate for a set period of time, there are a number of different products to choose between.  Another product that offers new customers an attractive introductory rate is the discount rate mortgage or discounted rate mortgage.  Unlike the fixed rate mortgage, this product offers an interest rate that is directly linked to the lender's standard variable rate, usually several percentage points higher.  

For example, if the lender's standard variable rate (SVR) mortgage was set at 5.5%, the discounted rate mortgage might be available at 3.5% for the first 2 years, after which time it would revert to the SVR.  As with the fixed rate mortgage, you would be tied into the mortgage contract for that initial 2 year period, and would then be free to look around to potentially improve your deal either with the same provider or a completely different one.

Tracker mortgages, that track the Bank of England's base rate (again, usually offering several percentage points above this rate) have been a popular choice in recent years with the base rate being held at a historic low rate.  There is a certain element of risk involved with a tracker mortgage, since the rate will go up within a month or two following a base rate rise, and you are tied in for an initial period at the start of the agreement. If you have savings you can also choose a mortgage product known as an offset mortgage, which usually must be from the same provider, which reduces the interest rate that you must pay according to the amount of interest you would otherwise be earning from your savings.  

Why would you choose a Fixed Rate over a Tracker Mortgage?

People choose a fixed rate mortgage when they want the financial security of knowing exactly what they will be paying towards their mortgage repayments each month.  Over the initial fixed period at least, they can guarantee that these repayments will not change.  If you choose to fix your rate over a long period of time, say 30 years, you may find that in the short-term a tracker mortgage would work out cheaper.  However, low rates always rise again and so the overall repayments for the two mortgage products are likely to work out to be similar over the 30-year period.

The type of mortgage product you choose depends on how risk-averse you are when it comes to your finances.  Tracker mortgage interest rates have the potential to rise significantly, according to factors that are out of the control of your mortgage lender, and as customers of some smaller UK building societies found out recently, even standard variable rates that are 'guaranteed' to be capped at a maximum rate can go up in special circumstances.  A fixed rate mortgage is really the only mortgage product where you can be certain about how much your monthly repayments are going to be and budget accordingly.

Are you looking to buy a property or improve on your existing mortgage?  Click here to fill out our short mortgage form and request a callback from an experienced mortgage adviser.