Posted on: September 20, 2023
Fixed Rates – What are they and how do they work?
The following article talks about fixed rates as a group of products. Fixed rates are a popular consumer choice, but this article does not seek to offer advice. It seeks to guide borrowers on the types of fixed rates, but borrowers should be aware there are other products that may be more suitable. Borrowers should always seek advice from a qualified mortgage adviser.
A fixed rate is designed to give the borrower an assurance of fixed payments over a given period. This can give the borrower reassurance of a set outlay during this period, thus removing the risk of rising payments whilst payments remain fixed.
There are many types of fixed rate on the market from a 2 year fixed to the much rarer fixed for the term of the loan. Deciding how long to fix for can be difficult as there are many factors a borrower may wish to take into account.
If prevailing rates rise the borrower is shielded from these rises for the period of the fixed rate, conversely if rates fall then whilst the borrower still has a guarantee of payments they may be paying a higher rate than the lower market average.
Lenders typically offer fixed rates over 2, 3, 5, 7, 10 years as well as fixed for term, albeit rarely.
Based on mortgage research carried out on our mortgage sourcing system Twenty7tec, at 75% loan to value on a purchase basis* there were 946 two year fixed rate products, 170 three year fixed rate products, 1076 five year fixed rate products and just 28 ten year fixed rate products.
From this we can see that 2 year and 5 year products are the most abundant and this is generally considered to be because of the demand for these types of product.
If after consultation a borrower feels a fixed rate is appropriate then they need to consider the “Total cost of Borrowing” over the fixed period. This is because mortgage products come with various benefits such as free survey fees or cashback, but also a fixed rate arrangement fee typically(but not exclusively) between £0 and £1,500. So you can see that a product with the lowest rate, might not be the most appropriate if it has a higher fee. Your mortgage adviser should have research tools that can work out the best product based on true cost over a given fixed rate period.
Another thing to consider with most fixed rates is that they will carry a penalty during the fixed rate period if the loan is redeemed. Typically this will be a percentage of the loan and might be in a reducing scale over the period of the fixed rate, or it may be a flat percentage. Most lenders allow you to overpay up to 10% of the outstanding capital in any one year without penalty. This allowance is not cumulative and so if you don’t use your annual allowance in any one year then it cannot be rolled forward to a new or current year. Lenders will normally allow you to “port” your mortgage if you decide to move so that you avoid paying the penalty. Any permission granted to port a loan to a new property is subject to the lenders agreement at the time of application.
So in considering the term of your fixed rate you will need to consider the following:
- Current and future expenditure
- Maximum or ceiling expenditure (worst case scenario)
- Expected future capital outlay
- Expected capital realisation
- Future moving plans
- Career plans
- Economic climate
And of course there may be other factors pertinent to a borrower’s specific situation.
It is fair to say that longer term fixed rates are more restrictive because of the penalty to change, however with this restriction comes a longer guarantee of payment. Conversely shorter term fixed rates are considered more flexible but can expose borrowers to higher payments earlier if prevailing rates are rising.
Deciding whether to fix or how long to fix for can be complicated. For specific advice on the best option for you can contact us as follows…
Tel: 0118 9410026
Email: craig.power@villagefs.co.uk or luke.spires@villagefs.co.uk
Facebook: https://www.facebook.com/villagefsreading/
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
22-08-2023 Correct at time of publication, but subject to change.
*source PRIMIS Twenty7 Tec mortgage research on 14/08/2023
