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Fixed Rate Mortgages
A fixed rate is a promotional interest rate, slightly lower than the standard variable rate (SVR), used to attract new mortgage customers. It only lasts for a limited period of time – around five years, depending on the lender.
A fixed rate is not effected by changes in the BOE’s base rate or the lenders SVR. A rate will be agreed between the lender and the borrower and will be fixed for the entirety of the agreed term. This means you can budget accurately each month because you will know how much your monthly mortgage repayments will be for a number of years.
If the SVR goes up one month a fixed rate mortgage holder will save money because they are not affected by a change in the SVR. If the SVR goes down one month a fixed rate mortgage holder may lose out on the savings of lower interest charges.
The major negative aspect of a fixed rate mortgage is that the borrower is almost always tied in for the agreed term. This means you get a redemption penalty charge for leaving the mortgage during the fixed rate term. Many fixed rate contracts also have overhanging redemption penalties associated with them. This means that the redemption penalty still applies for a period after the fixed rate term has ended. Redemption penalties should not affect you unless you end your mortgage before you have repaid it. If you think you might do this make sure you know about the penalties if there are any.
The most important thing to know is that when the fixed rate term ends the borrower is transferred to the lenders SVR.
Stepped fixed rate
This is like a normal fixed rate except the rate increases in stages like steps meaning you have lower interest repayments in the early stages and higher as the mortgage matures. An example of a stepped fixed rate from Yorkshire building society as at July 6th is as follows:
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0.00% fixed for 6 months from completion, then
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5.49% fixed until 31/12/10, then
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6.60% variable (their SVR) for the remaining term of the mortgage.
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