When taking out a fixed-rate mortgage, the initial rate remains fixed for a period lasting between 2 and 5 years (though it can be longer). The rate you sign up to is what you pay.
At the end of the fixed-rate period, the interest rate will revert to the lender’s standard variable rate. This varies from lender to lender so it is important to note when choosing a mortgage.
If you decide to cancel your fixed-rate mortgage before the end of the fixed period, you will receive a penalty in the form of an early redemption fee. This will usually be between 1% and 5% of the cost of the mortgage.
Protection from Interest Rate Rises
One of the major advantages to a fixed-rate mortgage is that you are protected from any increases in the Bank of England base rate. Even if the base rate goes up, you repayments will remain the same.
Another advantage, which will appeal particularly to those on a smaller income, is that establishing a set monthly mortgage payment for several years makes it easier to budget around the home.
Standard of Living
The lower interest rates in the first few years of the mortgage could also free up funds that may have otherwise been used if a similar tracker mortgage had been taken out instead. This could help to furnish your new home or improve your standard of living.
The Government's Funding for Lending Scheme, launched in August 2012, has driven fixed-rate mortgages to a record-low level, especially for those with large deposits.
Like any mortgage type, there are some disadvantages.
With the early redemption charges attached to most fixed-rate mortgages, you will not be able to change your mortgage without having to pay a substantial fee.
With this restriction upon your ability to switch to a more competitive interest rate during this period, there is a chance that you could become trapped in a mortgage that isn’t providing the very best deal for you.
Most fixed-rate mortgages will charge an arrangement fee. These have risen quite significantly to compensate for falling rates since the Funding for Lending Scheme began in 2012 and should be factored carefully into a mortgage decision.
As always, we recommend that you seek professional advice if you are unsure which type of mortgage is right for you and that all of the information provided above is for use as an overview only and should not be the basis for your mortgage decision.