A fixed rate mortgage, in its simplest form, will provide you with the exact same mortgage payment for a set period of time. Initially, they seem fairly easy to understand and uncomplicated, although there is far more to this type of mortgage product than people expect.
You see, you will only receive a fixed rate (hence a fixed payment) for the initial period of the mortgage and this can usually be anywhere from one year up to ten years. With that being said, due to the economic climate, far longer fixed periods are now being offered by many companies.
However, once your fixed period ends you will then go onto a variable rate, which is typically higher than the rate you have been on for the previous year(s). This will also mean that your mortgage payments are likely to increase as well.
How Does a Fixed Rate Mortgage Work?
Let’s say you have taken out a five year fixed rate mortgage – this means that your mortgage rate, and indeed your mortgage payment, will stay exactly the same for a five year period.
This is irrespective of whether the variable rate of the company you have taken your mortgage out with changes or if the Bank Base Rate changes. You have basically secured yourself the same payment for the next 60 months.
This means that if interest rates go up, those people who have a variable rate mortgage will see their monthly payments go up, but meanwhile you are completely protected.
However, the same can also be said the other way, so if interest rate drops, those with a variable rate mortgage can enjoy lower monthly payments, while you are stuck with making the same payment.
You will typically find that a fixed rate mortgage will incur early repayment charges. This means that if you want to pay off your mortgage in full, perhaps you’ve been lucky enough to have a windfall or a huge bonus from work, you will need to pay back more than your actual mortgage amount.
This is because your mortgage company expects you to fully see out the fixed rate period before paying off your mortgage and are therefore penalizing you for doing so. With that being said, many mortgage companies also offer the ability to make slight over payments each and every year, and even during the fixed rate period.
As an example, you may be allowed to pay back a total of 10% of your overall mortgage balance each year without incurring any penalties.
This can, of course, become extremely confusing if you don’t have a financial background or are not knowledgeable about the workings of a mortgage. This is probably why many people turn to a mortgage specialist in order to obtain some sound advice before they finally take the plunge.
You may even find that a fixed rate mortgage is not the most suitable type of mortgage product for you, as this will largely depend on your personal circumstances.
Depending on your work life, family and future commitments an entirely different mortgage product may be far more suited to you. This is why, if you need it, you should turn to help from an expert.
Nancy Baker is a freelance blogger at Benson Mortgages, which deals with private investor mortgages in Toronto. She is very passionate about still photography and stop-motion filming techniques.