Fixed Rate Mortgages

Written by Jeremy Horelick
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The greatest advantage of fixed rate mortgages is the peace of mind they offer borrowers. If you're buying your first home, chances are you're on a budget, not just for the home itself, but for all your expenditures. Hence, it's critical that you know exactly what to expect from month to month with no surprises built in. If you appreciate the assurance of a locked-in rate, a fixed rate mortgage is for you.

Fixed rate mortgages work by securing an interest rate for a given term. This may be as short as six months or as long as the life of your mortgage, which can be up to 25 years in some cases. Once the agreed-upon term ends, however, your rate returns to the SVR, which is set by the Bank of England. The obvious advantage to this is that if interest rates rise, you're guaranteed the same low rate. On the other hand, if rates drop, you're committed to that very same rate.

The Benefit of Fixed Rate Mortgages

If you characterize yourself as more "risk averse" than "risk neutral," a fixed rate mortgage is a sensible product. If, on the other hand, you have a higher tolerance for risk and feel confident that you can game the system to your advantage, there are better alternatives for you. One of these is the tracker mortgage, which quite literally tracks the base rate.

But, you might say, doesn't a variable rate mortgage do the same thing? Well, in concept, yes. In reality, however, lenders are usually less zealous about passing along savings after base rate drops than they are in socking borrowers with rate hikes. A base rate tracker mortgage is guaranteed to mimic the base rate, which means you can more accurately track changes in your interest payments, especially before they occur.

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