Figures from the Bank of England, during March and April this year, have shown that the number of mortgage approvals has risen by 6,131, which is the biggest increase in six years. This year has also seen rates dramatically plummet, with 10 year fixed rates falling to below 3% in February and 5 year fixed rates to below 2% in April, which is the first time we have seen them this low. With this being the case, there is no better time than now to think about getting a mortgage, particularly as economists are predicting rates will start to recover and therefore rise over the next few months.
Let’s firstly get back to basics and explain what a fixed rate mortgage is. The name is a bit of a give away, in that this type of mortgage has an interest rate that is fixed for an agreed term, for example 2, 5 or 10 years. For this reason, fixed rate mortgages are often considered to be the safest option as monthly repayments will remain the same throughout this period. When the mortgage reaches the end of its fixed rate period, it usually transfers to the lender’s variable rate, which typically follows the base rate set by the Bank of England.
As with any mortgage deal, there are certain advantages as well as disadvantages, which you have to take into account before deciding whether to commit:
- You will know exactly how much to budget for each month as repayments remain the same during the fixed term.
- If interest rates increase during your fixed term you will still pay the amount originally agreed.
- As much as it is advantageous that if interest rates rise you won’t have to pay extra, unfortunately it doesn’t work the other way around. If interest rates were to suddenly drop during your fixed term you would get no benefit from this and would still have to pay the rate you initially agreed upon with your lender.
- If you want to pay off your fixed rate mortgage early there may be an early redemption penalty, which is likely to be expensive.
- Starting rates are usually higher than on variable mortgages.
- Some fixed rate mortgages have the condition that borrowers must remain with the lender for a certain length of time even after the fixed rate period has come to an end.
We would advise you use one of the free online mortgage calculators to see who can offer you the best deal and which type of mortgage would be best suited to your circumstances. Read our article ‘What are the best online Mortgage Calculators?‘ for helpful advice, as there are so many available it can be hard to know where to start!
As a general rule of thumb, the fixed rate is likely to be higher the longer the fixed deal. So, for example, a two year fixed period is likely to have a lower rate than that of a five year fixed deal. From the lenders point of view they are taking out a risk by lending you the money and if interest rates change, which they are more likely to do over a longer time period, they need an insurance policy to protect them, hence a higher rate on longer terms.
Banks and mortgage providers are constantly competing for mortgage customers and because of this they have slashed their rates considerably, most noticeably for five and ten year loans. David Hollingworth, who works at London and Country said,”Rates have plummeted to new lows eclipsing the previous best in mid-2013 and it’s not just those with huge deposits that are seeing the benefits. Being able to fix at such low levels can offer significant savings now and also protect against rate rises in the future. Borrowers still need to look beyond some of the eye catching rates as the very lowest rates can come with hefty arrangement fees. However lenders are catering for all types of borrower and will usually have a range of rate and fee combinations to suit every homeowner.”
Here are some of the best deals currently available, based on a £350,000 home with a 10% deposit for a loan over 25 years:
- Rate – 2.59%
- Fees – £1,495
- Monthly repayments – £1,427
- Rate – 3.29%
- Fees – £975
- Monthly repayments – £1,542
- Rate – 3.59%
- Fees – £995
- Monthly Repayments – £1,592
- Rate – 4.79%
- Fees – £999
- Monthly Repayments – £1,803