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Kelsey’s guide to mortgages and home loans, for beginners

HomeNOT TRYING TO SELL YOU ANYTHING, JUST FREE INFORMATION THAT YOU MAY FIND HELPFUL

Fixed Rate Mortgage

A fixed rate mortgage is a mortgage where you agree a fixed interest rate for a certain period of the mortgage – a common fixed period is 5 years, but you may get deals for 10, 15 years and even for the life of the mortgage. Usually the longer the fixed rate the worse deal you will get; and also note that fixed rate mortgages will always start at a higher rate of interest than if you were to start at a variable rate – the bank charges a higher rate in order to offset some of the risk in case rates go up and they are stuck lending to you at a lower rate. On the other side of the coin, for you the customer, you may pay a little more to start with but have the certainty of knowing what your repayments are going to be during the fixed period.

It is common practise for financial advisors to recommend a 5 year fixed period when you apply for a mortgage, as this is usually believed to offer the best balance in security and flexibility. Also if you get a fixed rate deal the bank will specify penalties [cash amounts] for ending the loan [or repaying it effectively]; for example, on a loan of 150,000 tied in for 5 years you may be required to pay a 5,000 penalty if you end the loan in the first year, 4,000 in the second year, 3,000 and so on until the fix period ends and the penalties do also.

Don’t forget that once the fixed rate ends your mortgage will revert to the bank’s variable interest rate amount – this is usually a few percentage points higher than the national interest rate – if interest rates have increased substantially during your fixed period you may be in for a nasty hike in your repayments once you reset – obviously the best time to re-mortgage is at the end of your fixed period – usually onto another fixed rate deal.

 

 



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