What is a fixed rate mortgage?

Posted on November 23, 2010
Filed Under Mortgage Types | Leave a Comment

What is a fixed rate mortgage and why is it so popular over all of the other types of mortgages on the market?

A fixed rate mortgage is actually a very simple mortgage. You and your potential lender enter into a mortgage agreement. You agree that they will lend you a some of money, on which you use the house you are buying as security, and you agree that for a certain amount of time you will pay them a fixed rate of interest.

With a fixed rate your interest is always the same
So a fixed rate mortgage refers to the fact that the interest rates are fixed and cannot change, for an agreed amount of time.

This can be good news or bad news. This type of mortgage is very popular and known by a lot of borrowers because it gives security to the borrower. You know that for however long your agreement is in place how much money you need to budget for your mortgage each month.

The good and the bad of the fixed rate
If suddenly base rates shoot up and your bank adjusts their standard variable rate accordingly, you know that you are protected from these changes and can sit there happily paying the same amount. However, if interest rates take a nose dive you can be left paying over the odds. And that is where the other element of the fixed rate mortgage comes into play – the penalty clause!

You agree that you will pay the fixed rate for a certain amount of time and if in that time period interest rates fall, then you could be worse off than on other types of mortgages. It might seem to be the simple answer to move to somewhere else, but your lender is aware of this and huge financial penalties can be incurred, for example the equivalent of 3 months’ interest.

After a fixed rate
Also, quite often after a period on a fixed rate mortgage you have to move to your lenders standard variable rate. Again, this is a way of them making more money out of you and there is usually a decreasing penalty as you near the end of the standard variable rate that follows.

Who is a fixed rate mortgage for?
Who would typically choose a fixed rate mortgage? Well those people to whom the financial security of knowing how much they will be spending on their mortgage each month is worth more than potentially saving some money if interest rates drop. You are sacrificing future possible savings for the security of knowing that your payments are affordable.

So, if you do not mind if your mortgage may not be as cheap as it could be in the future but want the security of easy budgeting, talk to you financial advisor about a fixed rate mortgage and the benefits it might have for you,.

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What is a fixed rate mortgage?

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