With a fixed rate mortgage the monthly repayment
amount is fixed for a specified period. The fixed rate remains
constant irrespective of changes to the Bank of England's
base rate or the lender's standard variable rate.
The fixed rate mortgage period typically lasts for
two to five years, although it can be longer. At the end
of the fixed rate period the interest rate reverts to the
lender's standard variable rate.
An early redemption penalty will apply should you wish
to cancel your mortgage before the end of the fixed period.
Furthermore, many fixed rate mortgages 'tie you in' for
longer periods. This is because an early redemption penalty
is charged if you cancel your mortgage within a set number
of years following the end of the fixed rate period.
Pros and Cons of a fixed rate mortgage
Advantages It is easier to budget for your mortgage repayments
as you will know exactly how much you will be paying over
the fixed rate period. You can usually benefit from a lower
interest rate in the first few years, freeing up money for
furnishings, carpets or whatever else you want. You are
protected from any increases in the Bank of England's base
rate.
Disadvantages Early redemption penalties will almost certainly
apply, which may also extend beyond the end of the fixed
rate period. This means you will be unable to change your
mortgage during the 'early redemption penalty period' without
paying a fee, which may be up to the value of six months
mortgage repayments. Consequently: - During the fixed
rate period you may miss out on a more competitive interest
rate if the lender's standard variable rate drops to less
than the fixed rate. -
You may be trapped in an uncompetetive rate once the interest
rate reverts to the lender's standard variable rate. You
will normally have to pay an application fee when arranging
your fixed rate mortgage.
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