A fixed rate mortgage is where your interest payments are fixed at a specified level for specified period of time and means that you will pay the same amount of interest for a specified term (usually between one and five years). This allows you to budget more effectively at the start of your mortgage.
Disadvantages to Fixed Rate mortgages
The fact that your mortgage has a fixed rate feels comfortable and warm when the Bank of England rate rises, but when it drops the borrower suddenly has the cold feeling of paying more for their mortgage than the prevailing rate. The lower the rate drops the worse that feeling is and there will be nothing that can be done until the time period agreed for the Fixed Rate is over.
No Rate Drop Windfall
While it offers absolute certainty to monthly mortgage repayment it allows no bonus of rate drop windfall. The Capped Rate mortgage and the Variable Rate mortgage for instance can both deliver a welcome hand-out if the rate should fall.
Watch For Overhanging Redemption Penalties
Escaping from your Fixed Rate mortgage is usually an expensive move too. There will be early redemption clauses and penalties to prevent you from fixing the rate while the going is good and changing you mind if it looks like going up. These will be in force during the period of your Fixed Rate mortgage but there are even penalties known as overhanging redemption penalties from some lenders which run for longer than the Fixed Rate time period. As always with mortgages it pays to be aware of all the possible ramifications of changes of circumstance before you commit.
Locked In To An Uncompetitive Mortgage
The rates on offer for Fixed Rate mortgages can look very attractive but thatís because they will be fixed for a number of years. For instance, if the Bank of England base rate was artificially high for some reason a lender may be perfectly happy to offer a low fixed rate in the knowledge that once the rate drops they will have you locked in for a number of years to what may be an uncompetitive mortgage.
Lack Of Flexibility
The tie-ins surrounding a Fixed Rate mortgage make flexibility and change to your mortgage quite difficult and for some borrowers that may be a deciding factor if they want to shop around on a regular basis and benefit from new deals.