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How effective are fixed rate mortgages?

There are a number of different mortgage types available these days, with something to suit a wide range of needs and circumstances. This includes variable rate mortgages, fixed rate mortgages, base rate tracker mortgages, 100% mortgages, bad credit mortgages, discount mortgages, and more.

Taking on a mortgage is a huge financial commitment, and a long term one for most people, and finding the right mortgage for your needs is therefore extremely important.

One type of mortgage that has rocketed in popularity over the years is the fixed rate mortgage, and many people opt for this type of mortgage because of the increased financial stability it provides. The main benefit of a fixed rate mortgage is that the interest rate if fixed for a specified period of time, and this means that your monthly mortgage repayments will be exactly the same every month throughout the fixed term no matter what happens with the base rate.

The fixed rate terms offered on these mortgages can vary, and the most popular are two and three year fixed terms. However, there are longer fixed terms available, such as five, ten, or even twenty five year fixed terms. Many people feel uncomfortable tying themselves into a particular rate for such a long period of time, however, which is why the take up on longer term fixed rate deals is quite low.

Throughout the specified fixed term your mortgage interest rate and repayments will remain unchanged. However, once the fixed term period comes to an end your interest rate will revert to the lender's standard variable rate, and depending on what the SVR is at the time your interest rate and repayments may go up or down. A fixed rate mortgage offers increased peace of mind and stability to many, and these mortgages are particularly popular amongst first time buyers who are getting used to budgeting and don’t want to have to deal with fluctuations in repayments.

The downside to a fixed rate mortgage is that if interest rates fall you will still be fixed on the higher rate of interest, which means that your repayments will be higher than they would have been had you been on a variable rate mortgage. Of course, as many people have seen over the last year and a half the good point about fixed rate deals is that if the base rate rises your interest rate will not rise, so you won’t have to deal with the rate rises until your fixed term comes to an end, by which time interest rates may have fallen again.

Opting for a fixed rate deal is something of a gamble, and you have to take the highs with the lows. If interest rates go up and you are on a low fixed rate you can enjoy avoiding the financial pinch. If interest rates fall and you are stuck on a higher fixed rate you will have to make higher repayments than those on variable rate deals.

Of course, problems can arise with this sort of mortgage, which is something that many people may experience in the next few months. This is because interest rates have risen five times between August 2006 and July 2007, although there was a 0.25% cut in the base rate in December. This means that the many homeowners that took out cheap fixed rates two or three years ago are now due to revert back to the standard variable rate, which is considerably higher than the rate they have been on for the past few years.

Tom Smith
20th January 2008

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