(The following is a guest post)
Mortgages come in all shapes and sizes and homebuyers must consider all the options before coming to a decision no which is right for them. One of the products is the fixed rate mortgage, so letâ€™s take a closer look at this.
Fixed rate mortgages mean that the interest rate stays the same for the set period. And this means that monthly repayments always stay the same. This makes fixed rate mortgages particularly attractive to first-time buyers who want to be very clear on their financial commitment and have to budget their money carefully. In contrast, a variable rate mortgage means the interest moves depending on either the base rate or the lenderâ€™s rate, so monthly repayments change over time.
A fixed rate mortgage in the UK usually comes with a two to five-year term, but they may be longer. So, for the duration, homeowners are sure that the outgoing will always be the same. At the end of the term lenders usually automatically move the product to their standard variable rate mortgage, so homeowners should reassess their situation in advance so they can choose which new mortgage product to take out.
Fixed rate mortgages in the UK are available as repayment or interest only mortgages.
A repayment mortgage means that the monthly payment pays off the interest and the lump sum that was borrowed. This means the payments are a bit higher. But the whole loan is usually repaid by the end of the term so it is low-risk.
Interest-only mortgages have cheaper repayments each month because only the interest is being paid back. At the end of the term the lump sum is still owed and must be repaid somehow, such as through separate savings or investments. This is a riskier option and also means that the total amount paid back is greater.
The main benefit of the fixed rate mortgage is the peace of mind, but it does have some drawbacks. The interest rate is usually higher and if the base rate does fall homeowners do not benefit from this. Furthermore there can be arrangement fees and early repayment charges to consider.
Homeowners should get professional guidance from a mortgage broker, their bank or building society or an Independent Financial Adviser to ensure they sign up for the property loan that is best suited to their situation. The market can be confusing so it is wise to enlist the help of an expert to avoid getting into difficulties with your finances.