Under a fixed rate mortgage product, the lender agrees to fix the rate at which you pay interest for a period of time. This period is typically two, three, or five years.
At the end of the initial product term, your mortgage will revert to your lenders standard variable rate.
Fixed rate mortgage – advantages
The major advantage of a fixed rate is you know exactly what your mortgage payment will be for several years ahead. Regardless of changes in the base rate, you can be absolutely sure that you will not pay a penny more towards your mortgage during those early years.
This is a particularly attractive feature for first time buyers who are often stretching their budgets to get on to the property ladder, or for families or borrowers on fixed incomes who appreciate a stable pay rate.
Fixed rate mortgage – risks
The risk with a fixed rate mortgage product is that you fix at a rate which becomes much higher than the prevailing pay rate on the market.
This is what happened in recent years to those who took fixed rate mortgages around two thousand and seven and two thousand and eight. Whereas fixed rates at that time were being offered in the five per cent range, by the end of two thousand and eight borrowers on tracker rates may have been paying as little as one per cent on their mortgage.
Fixed rate mortgages – apply quickly
Lenders tend to secure funds for lending on a fixed rate product by borrowing from other banks in ‘tranches’. A ‘tranche[ is a slice of structured financing where one bank lends to another on agreed terms.
This arrangement mean that the funds available for each fixed rate products are limited -as a result an attractive fixed rate product will soon have it’s fund tranche exhausted.
Fixed rates are introduced and withdrawn from the market every day and each product is only on offer for a few weeks at most.
Therefore if you see a fixed rate that you find attractive, it is important that you do not delay in getting your application submitted and secure the rate. Lenders will generally levy a product fee to secure a fixed rate mortgage and the cost of this should be borne in mind when calculating the overall suitability of a product.
To establish if a fixed rate mortgage is right for you, you should speak to an independent mortgage broker – contact us now.
