FISCUS MORTGAGES - INFORMATION AND ADVICE

Fixed Rate Mortgage

With a fixed rate mortgage, your monthly repayments are fixed for a set period of time, despite fluctuations in the Bank of England base-rate. Usually this term can be for between one and five years, after which the interest switches to a standard variable rate (SVR).

A fixed rate provides a homeowner with the reassurance that changes to the Bank of England base rate cannot affect their monthly mortgage repayments. However, removing this element of risk comes at a price.

THE RISKS OF A FIXED RATE MORTGAGE

Firstly, the lender will charge a premium for the fixed rate. If a variable rate is typically 1% higher than the UK base rate, then a fixed rate mortgage may, for instance, be priced at 2% above the Bank of England’s repo rate. This is because the risk involved in base rate fluctuations is borne by the lender rather than the borrower. They therefore charge a higher rate for carrying this risk burden.*

Secondly, there is still risk involved in opting for a fixed rate mortgage. It is the chance that the Bank of England’s base rate falls during the fixed-rate term. This is more an “opportunity cost”; you have missed out on the opportunity to save money, even though the price you pay has remained constant. It is therefore worthwhile opting for a tracker mortgage if it seems that the central bank’s Monetary Policy Committee (MPC) will be leaning towards a lower interest rate for the foreseeable future.

SWITCHING FIXED MORTGAGES

With regards to risk, it is worth remembering that depending on your home loan, it is possible to switch your mortgage with relative frequency (typically every 2-5 years). It is usually best to see what offers are available as your fixed term draws to a close. After the fixed-rate term, the lender will usually charge their standard variable rate (SVR), which is usually always uncompetitive.

It is also worth annually reviewing your fixed rate, and it is worth noting that many lenders will pay many of the switching costs involved in transferring your mortgage from one provider to another. It is certainly worth shopping around for fixed rate products when interest rates look set to rise, as this could lead to a substantial saving for your next fixed term. However, don’t forget that your first port of call should always be your existing lender, who will be keen to retain your business and are thus likely to offer you competitive terms to stay with them.

Compare the latest fixed rates deals available from the majority of financial institutions in the UK, with our fixed-rate mortgage tables.

* There has been a notable increase in the usage of “debt capital markets”, by investors and speculators. What this means to you and me, is that new fixed-rate mortgage products are beginning to appear on the market which provides a lower fixed-rate. This is because the mortgage providers have offset their own risk by passing it onto individuals and institutions that trade in risk. As the lenders have lowered their exposure to interest rate risk, they pass on some of the saving to consumers.