The Pros and Cons of a Fixed Rate Mortgage
Taking out a mortgage is a big step, and it pays to do as much research as you can before committing. The last thing you want to do is over-extend yourself, and find that your dream home turns into a nightmare because your mortgage simply wasn’t the right one for you and your circumstances.
The good news is that there is a plethora of different mortgage options available to you, and as banks and other lenders start to ease their restrictions (a little, at least), even more opportunities are opening up.
The main types of mortgage are fixed rate and variable rate. This blog focuses on fixed rate mortgages and the pros and cons of them, giving you more of an idea as to whether this is the direction you should be heading in.
A fixed rate mortgage means that you will be paying a set amount of money each month for two, three, five, sometimes even 10 years (depending on the deal you opt for). The interest rate is fixed, hence the name for this kind of mortgage, and therefore the payments remain the same for the life of the deal. Here are the pros and cons of fixed rate mortgages for you to consider.
- Fixed rate mortgages offer the security of knowing exactly what you will be paying out each month for your property. The amount will not change for the life of the initial term of the loan, and you will be able to budget the rest of your finances more effectively.
- A fixed rate mortgage can be cheaper than a variable one since lenders are dropping the percentage rates of their interest to entice more people to apply. Therefore, you might find that a fixed rate mortgage has a lower interest rate than a variable one.
- You will often find that, although the attention grabbing interest rates on fixed rate mortgages are low, there is a hefty arrangement fee to contend with, which might push the mortgage out of reach of some people who are already on a tight budget (although, if you are looking for a positive spin on this point, if you fix the mortgage for a number of years you won’t have to pay the arrangement fee again for some time).
- Fixed rate mortgages lock you in for the term, and that means you should be planning to stay in your new property for at least as long as the fixed rate period on your mortgage. If you move before it’s up, you will be asked to pay a fee for the privilege. This is especially important to bear in mind if you are opting for a longer fixed period such as five or even 10 years.
- If you do move, you might not be able to transport your mortgage across, and you could therefore lose out on saving a good deal of money. Don’t count on being able to do this if you are thinking of moving (speak to your lender to determine whether it is possible).
A fixed rate mortgage will be the perfect solution for some, and a nightmare for others. Make sure you go through all the pros and cons with everyone who has a financial say in the property, and work out which scenario is going to suit you the best.