Why Should I Lock In a Fixed-Rate Mortgage
Deciding the best way of financing your home can be a complex and confusing process – making sense of mortgage products and special offerings is essential to getting a good deal. One option worth considering is locking in a fixed-rate mortgage, which will give you protection from rising interest rates with controlled monthly payments over an agreed period. In this article, we’ll look at how this type of mortgage works and why it could benefit many borrowers in the UK. Our one caveat is that a fixed-rate mortgage will be the right mortgage for some but not others. For example, tracker rates might be cheaper but come with other risks! The beauty of our job is that every customer is different, and our job is to tailor-make the best mortgage option for each unique client.
What is a Fixed-Rate Mortgage
A fixed-rate mortgage is a type of loan in which the interest rate remains fixed for a certain period of time, typically between two to five years (but longer terms are available). To secure any mortgage, borrowers usually need to meet specific eligibility requirements, such as having decent and clean credit and income stability.
The process of locking in a fixed-rate mortgage starts with applying to the lender, which includes documentation such as payslips/tax returns (SA302’s from HMRC if you are not a PAYE employee), bank statements, and other financial records. It is best to line up these documents at the outset before you begin shopping around for potential lenders and available loan options. After choosing the most suitable rate from a lender, you will complete and sign various paperwork to lock in the interest rate and agreeing accompanying terms. An Independent Mortgage adviser with full access to the market is a very wise choice as all the research and running around is done for you. We would love to help you in this regard – we don’t charge a broker fee so there is nothing to lose either.
Stability
Locking in a fixed-rate mortgage provides homeowners with stability by allowing them to financially plan more effectively for their future. This is because a fixed-rate mortgage secures an interest rate for a certain period of time, regardless of the changes in market conditions or other external factors.
This means that borrowers can be assured that their monthly payments will stay constant, allowing them to budget and plan more reliably. Fixed-rate mortgages also give homeowners peace of mind as they are guaranteed not to experience any sudden or drastic increases in their monthly payments. Furthermore, fixed-rate mortgages offer additional security against rising inflation rates which could otherwise disrupt a borrower’s ability to repay their loan at the same interest rate.
As such, locking in a fixed-rate mortgage can provide medium to long-term financial security and stability over a period of years, enabling borrowers to better plan for their future and protect themselves from any unexpected financial shocks. While two-to-five-year fixed rates are common, lenders have offered ten and even twenty-five-year fixed rates! It is a noteworthy that presently a ten-year fixed rate is presently the cheapest on the market (Source: Conran Mortgages, 06th February 2023)
Who Should Apply for Fixed-Rate Mortgages
This type of mortgage is ideal for those who value stability and want greater control over their finances with minimal risk. Applying for a fixed-rate mortgage can be beneficial if you are able to commit to the same payments for the duration of the initial fixed rate term. It may also be suitable for individuals who have an unstable income as it provides peace of mind knowing that there will be no unexpected hikes in payments when interest rates fluctuate.
The majority of fixed rate mortgages do not have an additional tie-in period. Therefore, at the end of the initial period you are free to shop around and find a new deal without having to pay a redemption penalty. The risk is that no-one knows what the interest rates will be like when your initial rate comes to an end.
Most lenders will allow clients to overpay their mortgage, typically up to 10% in each year, which can mitigate the risk of higher interest rates upon expiry of the existing one. This is, of course, not for everyone, but an option none the less.
Potential Drawbacks of a Fixed-Rate Mortgage
When taking out a fixed-rate mortgage in the UK, there are several drawbacks to consider. The main disadvantage is that if the Bank of England base rate drops, borrowers with a fixed-rate mortgage will not benefit from any decrease in interest rates that could potentially save them money. Since fixed-rate mortgages generally (not always) come with higher initial interest rates than variable/tracker mortgage options, borrowers may be paying more initially than necessary.
While many people take advantage of low introductory offers when taking out a fixed-rate mortgage, they should remember that this interest rate often increases significantly after the set period of time has expired. To sum up, fixed-rate mortgages are beneficial for some borrowers in certain situations but can be quite costly and burdensome in other scenarios.
Deciding upon the best mortgage for your individual circumstance is not easy. Whether you are a seasoned financial professional or not, it is advisable to take advise. An Independent Mortgage adviser can guide you through all options. A good professional will NOT pressurise you into making rash decisions but simply give you facts and figures, allowing you to make an informed choice once you weigh up the options available to you.
Most Independent Mortgage advisers charge a fee for their service while receiving a further commission from the lender. At Conran Mortgages, we do not charge a fee whilst remaining independent. Our reviews say it all.