A fixed-rate mortgage is a mortgage whose interest rate does not change during the duration of the loan. Loans and deposits are susceptible to interest-rate changes that are applied by governments. Hence, interest rates may either increase for a loan, or it may decrease according to rate that is fixed by the government. In fact, the longer the duration of the loan, the higher is the chance that it may be subject to interest rate changes.
However, in fixed-rate mortgages, the interest rate on the mortgage is guaranteed to remain the same for a particular period of time in spite of the changes in rates that are bought about by government policies. The interest rate is usually held constant for two to five years.
Fixed-rate mortgages are one of the most popular mortgages among borrowers. This is particularly the case with first-time borrowers who can be guaranteed that the interest rate on the mortgage will not change during the tenure of the mortgage. The constant rate is very helpful when one needs to plan ahead for one’s monthly repayment options. One can be sure about the amount that one needs to repay each month. In the case of adjustable-rate mortgages, one needs to prepare for a repayment as per the changes in the interest rates that are applied by the government from time to time.
Lenders run a risk when they issue a fixed-rate mortgage. This is because they will not be able to capitalise on higher interest rates if the government hikes interest rates. Hence, fixed-rate mortgages carry higher interest rates. Similarly, interest on long duration fixed-rate mortgages will be higher than the interest on short-term fixed-rate mortgages.
Fixed rate mortgages are available for varying tenures. The repayment features that are offered with fixed-rate mortgages vary from provider to provider. For example, some lenders will provide a loan that allows overpayments. Others will allow a certain number of overpayments a year without the loan attracting a penalty.
One needs to be very careful when deciding on a fixed-rate mortgage. Studies have shown that in some cases, adjustable-rate mortgages are beneficial to the borrower. However, this is not the general case and one must carefully consider factors such as duration of the loan, cost of the property, ability for overpayments etc when planning to go in for a fixed-rate mortgage.
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