Is a Fixed Rate Really The Best Solution When Remortgaging?
When you decide to remortgage your home, one of the decisions that you will have to make will be the type of product. The products available include fixed rate, discounted rate, variable rate and offset, but how do you know if the time is right to select a fixed rate?
Interest rates are currently at their lowest level ever, just half a per cent, so logically there appears to be only one direction in which rates are likely move over coming years. Therefore, it might seem obvious to opt for fixed rate deals sooner rather than later, in order to shield your finances against significant rate rises in the coming years. In an ideal world, life would be that simple, but it isn’t. This handy step by step guide examines the pros and cons of fixed rate mortgage deals.
Fixed rates are generally the most popular type of mortgage product in Britain. Figures suggest that between 50 and 75 per cent of mortgages and remortgages are taken on a fixed rate basis and this number is likely to increase further as interest rates in the UK start to rise.
The biggest advantage of that a fixed rate mortgage has is the fact that you know precisely what you are paying for a given period of time. Fixed rates tend to run for a minimum of two and a maximum of five years. During that period, your mortgage payment will stay at a fixed amount, even if there are fluctuations in interest rates during that time. This in turn allows you to budget and gives you some predictability in your outgoings.
Fixed rates provide you with the certainty of knowing what your home loan repayments will be. Even if the Base rate rises sharply, your rate would not change. This could end up saving you a considerable sum in interest charges.
One of the cons with a fixed mortgage however, is that the initial fees for taking out the mortgage are often higher than other types of mortgage product. You may also be paying over the odds in repayments if the interest rates stay low over your fixed period.
On a £200,000 interest only mortgage, a 2 per cent rise in the interest rate charged would cost an additional £333 per month. Of course, you could end up saving a considerable amount of money in the medium to long term, particularly if interest rates rise quickly. However, whilst interest rates remain low, you could actually be paying a ‘premium’ for the benefit of fixed repayments.
Fixed rate mortgages also offer less flexibility than discounted and tracker deals. This is because the vast majority of fixed rate products have ‘early repayment charges’. If you repay part or all of your mortgage during your fixed rate, the lender will typically charge you a penalty which can be as high as six months repayments.
Though there are many high street lenders who will allow you to move your fixed rate from your existing lender to them if you sell and buy simultaneously you could still face a large penalty if you manage to repay your mortgage early. There are many discounted and tracker mortgage products which are exempt from ‘early repayment charges’ allowing them to be far more flexible and therefore affordable.
It is quite clear that the demand for fixed rate mortgage products will rise steeply over the coming months as the Bank of England have confirmed that they expect the base rate to increase in the final quarter of 2011.
Timothy Frodsham writes for JustRemortgages.com one of the UK’s
top sites for the latest remortgage rates and best remortgage deals.