When you’re ready to get a mortgage, you’ll have the choice of a variable or fixed rate deal. Forget the first one for now, as we explain everything you need to know about fixed rate mortgages.
What is a fixed rate mortgage?
Very simply, it’s a mortgage where you pay back the same amount each month for a set period – be it 2, 3, 5 or 10 years.
Fixed rate deals are popular because when you know exactly how much your mortgage will cost each month, you can work it into your budget.
There is a downside to fixed rates, though.
If you’re on a variable rate deal and things (interest rates) go in your favour, your monthly repayments can go down.
However, you won’t benefit from falling interest rates if you’re on a fixed rate deal because your monthly repayments are fixed.
The obvious upside is that if interest rates shoot up, you won’t be affected either – which means your monthly repayments will stay the same until your fix ends.
What happens when the fix ends?
However long your fixed deal lasts, here’s what happens when it ends:
You’ll be moved automatically onto your lenders bog-standard mortgage rate. This is called a Standard Variable Rate (SVR) and tends to be expensive.
The way to avoid this is to remortgage onto a more competitive deal before you slip onto the SVR.
Anything else to know?
Yes – some fixed rate deals come with a penalty if you choose to leave before the end of the 2, 3, 5 or 10 years.
They’re called Early Repayment Charges (ERCs) and can be expensive.
This doesn’t mean you can’t get out of your deal, or that you should completely avoid deals with ERCs – you just need to weigh up the cost of the charges against the savings you’d make by leaving.
If it costs you more in charges to leave than you’d save on a different deal, you might be best off staying put.
Don’t worry if you can’t decide which is best for you. The team at Mojo can help you choose. All you need to do is go through our Mortgage Matcher and book and appointment for a chat.