Fixed Rate Mortgages

Fixed rate mortgages are standard interest-only or repayment mortgages, but the interest rate does not change for a set period of time. The rate is usually fixed for between one and five years, but some lenders do offer ten and twenty-five year options. Once this introductory period has elapsed, you pay the lender's standard variable rate, which is usually much higher than the initial rate.

You can usually choose how long the fixed rate period will last. Your decision will have an effect on the overall cost of your mortgage. Generally, the shorter the term the better the interest rate and the lower the cost. However, shorter deals usually carry an early repayment fee. This penalty fee applies if you wish to switch lenders before the end of the fixed rate period. In some cases, this fee also applies for an extended period after the fixed interest period has elapsed, which means that you are required to pay your lender's higher, standard variable rate for an extended period. In this case the fee is referred to as an 'overhanging repayment fee'.

In contrast, longer term deals tend not to have the best interest rates, but could still be worthwhile if the Bank of England's base rate is set to rise. Conversely, if the base rate falls, you may be paying more than the average mortgage holder, which results in a higher overall cost for your mortgage.

This considered, you should aim to choose a medium-term deal: between two and five years. Crucially, you should get a good interest rate, whilst leaving yourself the flexibility to switch lenders at a later date.

Long-term fixed rate mortgage deals are becoming more popular. There are two main reasons: their 'simplicity' (you pay an interest charge based on a fixed percentage each month), and the 'credit crunch'. The recent credit crunch in the UK has increased the desire for longer term financial stability. While the average cost of living is rising considerably, average income is not. UK home-owners are increasingly required to plan their spending to avoid financial difficulties. Taking out a long-term fixed rate mortgage is an easy way to ensure your mortgage repayments do not rise suddenly, and are therefore easy to budget for. Long-term fixed rate mortgages may also remove the need to remortgage after several years to obtain the best interest rate, because the promotional fixed rate does not end after a short period.

Advantages and Disadvantages

Overall, the advantage of a fixed rate mortgage is that you can budget your repayments easily, since the interest charged is always a fixed percentage of the amount you owe. In addition, many fixed rate mortgages are also 'flexible', which means that you can overpay each month to repay your mortgage early and reduce its overall cost. The disadvantage is that if the Bank of England's base rate goes down you may be tied into a higher interest rate, which means that you pay more than those who opted for a variable rate deal.