If a borrower decides that they would like to fix the mortgage rates, in lay mans terms this means that there mortgage rate will be fixed for a specific period of time, and whilst the mortgage interest rate is fixed there will be no movement under any circumstances in relation to the borrowers monthly payments. Basically the monthly mortgage payments will remain fixed even if the Bank of England adjusts there interest rate, the adjustment could be a positive adjustment (i.e. increase the base rate which in turn should have increased the borrower monthly payment) or decreased the base rate (which would have decreased their monthly payment) but because the borrower decided to fix their mortgage rate and increase or decrease on the base rate has no effect.
A Fixed rate in the current credit crunch
The global credit crunch has been a financial black hold and removed any concept of what normal mortgage borrowing means to the general population of any developed country. The USA, North America and South America and the whole of Europe have been badly affected due the reckless risks of the global bankers. If a positive were to be sought out of this credit crunch with regards to a fixed rate mortgage it would be the fact that a member of a specific country or economy can fix their rate at a very low rate. Generally as a rule of thumb fixed rate mortgages are 1 to 2% a country bases rate which in normal times can be anywhere between 4 to 6%. With the average base rate been between 1 and 2.5% the margin is much more in favour of the borrower and to be honest there is no better time to fix your current mortgage rate.
The advantages & disadvantages of fixing your mortgage rate
Your rate will stay the same for the term of the fixed rate
This is the same for your monthly payments
The length of the term you fix for is up to up
You know what you monthly budget needs to be to meet the mortgage payment
They offer financial stability whilst the rate is fixed
They could offer an over payment facilitie
Peice of mind whilst the monthly payment is fixed
Once you have fixed your mortgage rate you will not see any benefits if the bank of England reduce the base rate
A fixed rate tends to be slightly more expensive than any other mortgage product
Fixed rates also tend to have higher arrangement fees
Whilst the rate is fixed you will be tied in and if you decide to leave you will have to pay an Early Repayment Charge this is generally a % of the balance (remember will be higher for an interest only mortgage as the capital balance is not reducing over time)
The longer you fix the interest rate of your mortgage the higher the interest rate will be.
Some lenders might not offer the over payment facilities with a fixed rate mortgage
Can anyone remember the 1987 -1988 recession that hit the UK under the Thatcher government were the base rate peaked at 15.5%, imagine if you can how much those poor people had to pay if they were not on a fixed rate mortgage. There would also of been plenty of ambulance chasers who would have had to been miss sold their mortgage (savers then would have been estatic).
The different between that recession and this credit crunch is that the complete opposite has happened in relation to a member of the public who decided to fix their mortgage before the credit crunch. Basically the ones who are on fixed rate mortgages are now paying a lot more than those people on none fixed rate mortgages due to the fact that the current UK base rate is so low. How ironic 25 years later we have a recession but the exact opposite with regards to fixed rate.
I hope you have enjoyed the content of this article and please feel free to visit us at www.kpmfinancialservices.co.uk for further advice.
One final word I bet the people in the 80s who complained they were been miss-advised i.e. we wanted to fix there off spring are now saying we did not want to fix... an in the next 20 years
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