One of the most common types of mortgage homeowners choose to take out is a fixed rate mortgage. In this article, we will discuss the benefits of fixed rate mortgages, the disadvantages, and whether to choose a shorter or longer term fixed rate mortgage.

What is a fixed rate mortgage?

A fixed rate mortgage is a type of mortgage loan where the interest rate remains the same throughout the entire term of the loan, as opposed to a variable rate mortgage, where the interest rate can go up or down. This means that the borrower can protect themselves from any potential rate increases, providing peace of mind and security. 

Benefits of fixed rate mortgages

Fixed rate mortgages are generally known as the stable option compared to variable rate mortgages, and have a few significant benefits:

Easier budgeting and financial planning

One of the biggest benefits of a fixed rate mortgage is that you know exactly how much you’ll be paying each month, which makes it much easier to budget and manage your finances. This can be especially important for first-time homebuyers or those with a fixed income, who need to plan their finances carefully.

Lock-in low interest rates

If interest rates are low at the time you’re taking out your mortgage, fixed deals allow you to lock in a cheaper rate for a period of time. This can be beneficial if you’re worried about future interest rate increases, or if you simply want to save money on your monthly mortgage payments.

Protection from interest rate increases

Conversely, a fixed mortgage can protect you if interest rates were to sharply increase. If you have a fixed rate mortgage, your interest rate will remain the same regardless of any potential increases in the market.

Disadvantages of fixed rate mortgages

While there are many benefits to fixed rate mortgages, there are also some potential drawbacks to consider.

Early repayment fees

One potential disadvantage of a fixed rate mortgage is that many lenders charge early repayment fees if you want to pay off your mortgage early. This can be a significant cost, especially if you’re planning on selling your home or refinancing in the near future.

Overpayment restrictions

Some fixed rate mortgages also come with overpayment restrictions, which means that you can only pay off a certain amount of your mortgage each year without incurring additional fees. This can limit your ability to pay off your mortgage early and can be frustrating for those who want to get out of debt as quickly as possible.

Fixed mortgage terms

Most fixed mortgages are two or five-year deals but you can get longer terms where the interest rate is locked in for 10 or even 15 years.

2-Year and 5-Year Deals

2 and 5-year fixed rate mortgages are the most common types of fixed mortgages. These deals offer borrowers a fixed interest rate for the duration of the loan term, which can be beneficial for those who want to budget their finances carefully.

Longer Terms: 10-Year and 15-Year Deals

Longer-term fixed rate mortgages are less common, but they can be beneficial for those who want to lock in their interest rate for a longer period of time. These deals often come with higher interest rates than shorter-term deals, but they can provide more security and peace of mind for borrowers who want to avoid any potential rate increases in the future.

Choosing a Shorter or Longer Term Fixed Rate Mortgage

When deciding between a shorter or longer term fixed rate mortgage, there are pros and cons to consider. Shorter-term deals often come with lower interest rates, but they can be less secure if interest rates rise after the term ends. Longer-term deals offer more security, but they often come with higher interest rates.

Ultimately, the decision between a shorter or longer term fixed rate mortgage will depend on your individual financial situation and your long-term goals. If you plan to stay in your home for a long time and want to avoid any potential rate increases in the future, a longer-term fixed rate mortgage may be the right choice for you. If you’re planning on selling your home or refinancing in the near future, a shorter-term fixed rate mortgage may be a better option.

In conclusion, a fixed rate mortgage can provide significant benefits for borrowers, such as security and peace of mind for borrowers who want to avoid any potential rate increases in the future. While there are some potential disadvantages to consider, such as early repayment fees and overpayment restrictions, the benefits of fixed rate mortgages generally outweigh the risks. When deciding between a shorter or longer term fixed rate mortgage, it’s important to consider your individual financial situation and your long-term goals. 

If you are looking for a mortgage broker to find you the best deals on your new mortgage, please get in touch with us.