With so much interest rate uncertainty in the market borrowers are facing a dilemma as to whether they should fix their mortgage interest rate or not by applying for a fixed rate mortgage.
A fixed rate mortgage will provide absolute security against rate rises ensuring that monthly repayments remain constant regardless of what the money market is doing.
The interest rate, and therefore the interest payment, on the fixed rate mortgage will remain stable for the fixed rate period. The fixed rate period is usually between one and five years although it can be for longer.
Fixing mortgage repayments can help considerably with household budgeting which is why fixed rate mortgages are popular with low income earners and first-time-buyers.
Borrowers should be aware, however, that fixed interest rates are usually higher than variable rates offered on the same mortgage products. Additionally, as a general rule, the longer the fixed rate period is, the higher the interest rate will be.
This is because fixed rate mortgage lenders must provide themselves with a profit margin on the money they lend. If they are expecting interest rates to increase in the future, their costs will increase and the profit margin will decrease.
Lenders therefore need to build in a larger profit margin for fixed rate mortgage products when compared to variable rate mortgages. Mortgage products that have a variable interest rate should provide a profit to the lender for the entire term of the mortgage.
Another factor that borrowers should consider before applying for a fixed rate mortgage is early repayment charges and arrangement fees.
Although a fixed rate mortgage can save money over the long term if interest rates rise above the fixed rate, borrowers should take into account any fees that may be payable on an existing mortgage if it is redeemed and switched to a new mortgage product.
Additionally, fixed rate mortgage products may attract an arrangement fee. The cost of the arrangement fee should also be taken into account when calculating whether the fixed rate mortgage product is worth applying for.
If you are unsure on whether you should apply for a fixed rate mortgage, contact a qualified independent mortgage adviser for expert advice.
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