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Fixed Rate Mortgages

With this type of mortgage the rate of interest that you pay on your loan is fixed at a certain level over a given period, for example 5.00 per cent for five years. In the UK, the fix period is usually between one and ten years. Longer terms are available, but the lowest rates are generally to be found over shorter periods.

Some fixed-rate mortgages are fixed for a certain number of years and others until a set date. If a deal is set for a number of years, this generally begins when the money is advanced - that is, when you move in. If it takes a number of months for you to complete, this will eat into your fix period if you've opted for a set-date fix.

It is worth noting that the best deals may be on offer only for a limited period; you may have to act fast to secure a good rate.

Fixed rates have been particularly popular recently because we have experienced some of the lowest interest rates in history. Fixed-rate mortgages are funded by the money markets and the rates are governed by the market's expectations.

As part of an aim to stabilise the housing market, the government has been reviewing ways of developing a long-term fixed-rate market similar to those found in other parts of the world, with 25 to 40-year fix periods.

Disadvantages

The biggest disadvantages to fixed rate mortgages are redemption penalties. So if you want to Remortgage after 2 years into a 3 year fixed rate term you will have to pay a sizeable sum to do so. Many lenders extend this period to cover the first few years after the initial deal comes to an end, effectively tying you into to its standard variable rate for several years.

Advantages

The greatest benefit of a fixed rate mortgage is the security of knowing exactly what your monthly payments will be. Alan Dring, head of sales at Standard Life Bank, suggests a philosophical view. He says if your lender's standard variable rate (SVR) does drop below your fixed rate, you will feel disappointed and perhaps frustrated - however, a major consolation is that you will always know you can still afford your monthly payments. Another benefit is that if interest rates do rise, causing lenders to increase their SVRs, you will be paying less than other borrowers.

Why a Fixed-Rate Mortgage

Traditionally, fixed-rate mortgages have been considered suitable for first-time buyers whose need for budgeting and stabilising their outgoings is particularly great.  For first time buyers, getting on to the property ladder can mean keeping a very strict budget. With variable rate mortgages your payments can vary from month to month. With a fixed rate mortgage your mortgage payments stay constant for a set period, so you will know exactly how much you will need to pay for the duration of the fix rate mortgage deal, no matter what happens to the base rate. So you won't pay any more whether interest rates go up or down.

There are many determining factors that might affect rates over the next few months, but if expectations about economic growth, stock market recovery and inflation are positive, which they have been to a certain extent recently, then money market rates upon which fixed rates are determined will increase.