Mortgage rates: What are fixed-rate mortgages? Is it a cheap mortgage option?

MORTGAGES are often one of the greatest expenditures a person will ever make, which is why many people will be keen to find the type of mortgage which suits them the best. What is a fixed-rate mortgage?

By JESS SHELDON, The Express

PUBLISHED: 13:56, Tue, Jun 18, 2019| UPDATED: 13:56, Tue, Jun 18, 2019

When applying for a mortgage, the type that you choose will likely come down to what suits your circumstances. The mortgage types are split into two: either fixed-rate or variable. Of the latter, mortgages are split into three different categories: known as trackers, standard variable rates (SVRs) and discounts. As it may be inferred from its title, a fixed-rate mortgage has a fixed interest rate, which doesn’t change for the length of its deal.

“You’ll see them advertised as ‘two-year fix’ or ‘five-year fix’, for example, along with the interest rate charged for that period,” the Money Advice Service explains.

Deborah Vickers, channel director and financial expert at personal finance comparison site moneyguru.com, also shared some insight into this type of mortgage.

She said: “Regardless of the mortgage deal, do your research. There are so many different types of deals. “Fixed rate mortgages are great as you know exactly what your mortgage will cost, so this can help you with budgeting,” Ms. Vickers said.

“The rates on a fixed deal are normally higher than variable products and if the interest rates fall, you won’t see your payments drop. “The channel director also suggested doing some research before committing to one type of deal.

She said: “Mortgage fees can add up, so look around. If you like to budget and know what you are paying, then fixing could be a good idea. “It’s difficult to predict future of rate moves. The rates may fall, but you still have fees to pay. “It is worth checking all rates and fees when reviewing mortgage deals.”

The Money Advice Service explains that an advantage of a fixed-rate mortgage may be the peace of mind that monthly payments will stay the same for the deal period – which may help some people to budget.

It does point out though that fixed-rate deals may tend to be slightly higher than variable rate mortgages. Additionally, a borrower on this deal would not benefit if interest rates fall. It may also be that they face charges should a person want to leave the deal early.

Ms. Vickers warned borrowers about simply going for the cheapest rate, telling Express.co.uk: “When looking for something cheap, you have to be careful. When it comes to mortgages there are lots of rates and fees to watch out for.

“Something that looks ‘cheap’ and affordable monthly may come with a higher arrangement fee, a longer term, etc. You have to understand all costs associated with a mortgage product.”

Standard variable rate (SVR)

A Standard variable rate is the normal interest rate which a lender charges homebuyers, and will last as long as the mortgage, or until another mortgage deal is taken out. “Changes in the interest rate might occur after a rise or fall in the base rate set by the Bank of England,” the Money Advice Service states.

It also points out that while this may give a person freedom to overpay or leave, their rate can be changed at any time. “Each Lender has an SVR and [they] are dependent on the Lender – they can be anything from two or five or more percentage points above the base rate,” Ms. Vickers said.

“They can be cheap in some circumstances, if the base rate drops, on the reverse of this, they could go up. The main thing to consider with this is the uncertainty, you may be better to remortgage.”

Discount mortgages

A discount mortgage is where a discount is offered off the lender’s SVR, for a particular length of time. This means that the rate may be cheaper, meaning monthly repayments in that period are lower. The amount one pays may also be reduced if the SVR is cut too.

That said, it may not be preferable for some, as the lender may raise the SVR at any time, and these borrowers could be affected if Bank of England base rates rising. Other options are tracker mortgages, offset mortgages and capped rate mortgages, which could be of interest to some borrowers. When it comes to picking mortgage deals, Ms. Vickers continued: “Looking at what type of deal you want is a big choice and it is never easy. There are two distinct camps, fixed or variable.

“With a fixed you know exactly what your mortgage will cost, your payments will not change, no matter how high the rates go. The downside is that rates are normally higher than variable products.”