Fixed Rate Mortgages

This is one of the simpler forms of mortgage available in the UK market, the principle upon which fixed rate mortgages work is that they charge interest at a set rate for a pre-determined period of time, after which they will move to a variable rate. The name can be slightly misleading, as the 'fixed rate' only lasts for a certain period of time, so you should be fully aware of this fact.

A fixed rate mortgage is designed for those who want stability in their monthly outgoings, for example a borrower who is taking out a mortgage with repayments that they know they can meet providing they stay the same, but would struggle to meet them if interest rates, and therefore the repayments, were to rise. The fixed period gives the borrower an amount of time during which they can be certain of what they will have to repay each month, allowing them to accurately plan their finances.

The period during which the interest rates will be fixed for can vary, and will usually fall within the range of one to five years, although some mortgages allow for the period to exceed this. When arranging fixed rate mortgages, borrowers will agree the duration of the fixed rate period up front, as well as the rate of interest that will be charged over this time. Along with these two things, the standard variable rate will also be made known to the borrower - this is the rate of interest that the mortgage will move to once the fixed rate period comes to an end. The standard variable rate (SVR) tracks with the Bank of England base rate, so a 1% SVR will always be 1% more than the base rate, for example.

Interest rates on mortgages are always calculated in terms of a premium on top of the base rate, how much this premium is will vary from lender to lender, and also more so between the different types of mortgage. The premium charged on fixed rate mortgages is very dependant on the market conditions at the time it is taken out, if the lender believes that the base rate is set to fall within the fixed rate period, then the premium can be as low as half a percent above the base rate, conversely if interest rates look likely to rise sharply the premiums will be higher. The SVR that the mortgage reverts to at the end of the fixed rate period may be slightly higher than the rates on the standard mortgages, it is worth checking this when taking out the mortgage, and also at the end of the fixed period as remortgaging to get a better rate may be beneficial.

In general terms, fixed rate mortgages can be beneficial to those who want to remove the risk of a rise in interest rates from pushing up their mortgage repayments, for a certain period of time at the beginning of the mortgage. First time buyers, or those who are stretching a bit to be able to afford the repayments may find having a fixed period gives them peace of mind, and a stable base from which to progress from without worrying what the interest rates have in store around the corner.