Is it Good to Choose a Fixed Rate Mortgage?

Mortgages can be quite complicated because there are many different types. If you have had one for a while and are thinking of switching then you may be familiar with your choices but if you have not taken out a mortgage before you may not be. Many financial advisors may recommend that a first time buyer take out a fixed mortgage.
But why is this and is it the wisest choice?

The benefit of having a fixed rate mortgage means that you will know exactly how much money you will be paying out each month. You will then be able to plan around these payments and you will have no nasty surprises if the rates change. When you first take out a mortgage you will often be stretched financially. You will find that as the years go on, you will be likely to have more salary and should be able to afford the payments more easily (although having children and other circumstances may be an exception to this). Having a fixed rate for a few years though, will help you get used to paying a mortgage and give you some stability with regards to knowing how much you will need to be paying.

If you are thinking of switching to a fixed mortgage then this could again be because you want the financial stability. However, you may also be hoping to save money by switching. Consider whether you think interest rates may drop while you are in your fixed rate period and therefore whether it is worth it. If interest rates are very low, it is less likely that they will fall, but there is always a chance. Of course, if you are comparing to what might happen with a variable rate account, then you may think that if interest rates drop then they will drop as well, but this may not be the case. The lender may decide to not reduce the rates, just because the base rate has dropped, so unless you have a tracker, you may not benefit anyway.

Therefore, there are disadvantages of taking out a fixed rate mortgage as well. If you have a fixed rate and the base rate goes down, you will not see a reduction in how much you pay, but others may do. You may feel a bit annoyed if this happens and be stuck paying a lot more than others. However, if interest rates are already really low, the chances of them falling significantly is very low and therefore a fixed rate might be less of a risk than if rates were high and likely to fall.
If you have a fixed rate, you could be tied into it. This means that if you see a more favourable deal, then you may not be able to switch to it because you are not allowed to move your mortgage. You may even find that you are tied in after the deal ends to use the lenders variable rate for a while. Do make sure that you check this before signing up so that you know exactly what you are letting yourself in for.

If your fixed rate goes on for five years, for example and rates start falling really early into the term then you could be spending a lot more money than you need to over those years. If rates fall rapidly and by a lot then this could add up to a lot of money. However, it is sensible to look at what the rates are at first. If they are high, then chances are they could drop and have a long way to fall. If they are low, then they are less likely to drop and not by so much. However, things re hard to predict and you never know what might happen!

It can be wise to think about the term for the fixed rate period. You may like the stability of being on a fixed rate for quite a long time, but if you worry that rates may come down and better deals available then you may rather take up one for a shorter term so that you can have the freedom to switch fairly quickly, if you want to.

So deciding whether to take a fixed rate mortgage can be tough decision. You have to weigh up the advantage of having stability for a few years against the risk that interest rates may fall and you may lose out. It is not an easy decision as it is difficult to predict interest rates. Other economic changes could also have an influence on how much you earn, spend and job stability which could all have an influence on how easy it is to pay your mortgage. This means that unless you can predict the future (which no one can!) you will have to try to prepare for the worst, just in case but hope that everything will be okay.

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