The Mortgage Maze - Fixed Rate Deals
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There was a time not so long ago when the man on the street could appreciate and understand the two or three different types of mortgage available. Things have certainly changed over the last couple of decades. These days there are more mortgage product variants than there are choices of beverage down at your local coffee shop … and that’s saying something.
The market is evolving all the time. Lenders add newly titled mortgages to an ever expanding list, but the basic types of loan remain much the same. So, while there may be thousands of different products, they all fall into a shallow volume of categories. Fixed rate loans have become amongst the most popular, but are they as simple and straightforward as many seem to think? I reckon the fixed rate mortgage can be a wolf in sheep’s clothing.
The Concept of Fixed Rate Mortgages
Nothing complicated here, you might think. A fixed rate mortgage is surely exactly what it says it is, a loan with an interest rate that doesn’t change. Wrong! The traditional fixed rate mortgage has now been moulded into a completely different product, because it is rare to find a loan that stays the same for very long. Fixed rate these days means fixed for a limited period – and borrowers are left to decide from a choice of variables. That’s fine, if you can predict where interest rates will be in 2, 3, 5 or more years, but even the best economists have failed recently on that one.
That said, fixed rate deals are often good for first-time buyers (FTBs), because at least they know how much their mortgage repayments will be each month, regardless of changes to the bank base rate (which ordinarily influences any changes a lender might make to their products’ interest rates). Consistency is useful to FTBs, particularly when money might be thin on the ground.
However, watch out, because some of the very best fixed rate deals have a trap that many FTBs fall foul of.
Early Redemption Charges
Lenders often make an additional one-off charge to borrowers that choose to move their mortgage to another provider, because their products might have a lower interest rate or better terms and conditions – or they wish to sell the property and dispose of the mortgage by paying it up in full. The one-off charge is generally called an early-redemption fee. It is usually shown as a percentage of around 2 or 3 per cent (but can be more) and, importantly, this refers to a percentage amount based on the entire loan.
The early redemption charge usually applies during the fixed period and is intended to act as a disincentive for those borrowers that would like to move to another lender or sell-up within the early years of a mortgage. Of course, most borrowers will stay with the same lender in any event during the fixed rate period, but might want to move to another lender’s product at the end of the fixed rate period (because this is when the lender’s interest rate and monthly mortgage repayment are likely to increase substantially).
The trap is that some lenders inflict an early repayment charge that extends beyond the fixed-rate period, which effectively prevents the borrower from looking around for a cheaper mortgage when this period ends. This is sometimes referred to as a ‘tie-in’ clause or ‘tie-in’ term. Most of these tie-ins are imposed on a sliding scale, reducing the level of percentage over a set number of years.
Ideally, you should try to find a mortgage with no early repayment fee – or at worst, one whose early repayment fee regime ends when the fixed-rate period ends.
Fixed and Flexible
There are flexible fixed rate mortgage deals available, which always sounds like a contradiction in terms to me, but there we are. The flexibility here generally refers to the ability to make overpayments, which can be an advantage as it reduces the debt when income is plentiful and often triggers the right to apply a holiday period to the repayment schedule in the future (if you hit a period when income is in short supply).
Overpayments are something that many lenders object to, because it limits their ability to make money from you through standard monthly repayments over a prolonged period. So, any lender that offers an overpayment option is one to consider, as it presents you with more choices if things become tough later on (assuming you have built-up an excess in your repayment schedule earlier on).
However, there’s a catch. Most flexible fixed rate deals still don’t allow you to make overpayments that bring the debt to a nil balance, without incurring an early repayment fee. In other words, you ordinarily won’t be able to make additional payments over and above your scheduled repayments, in order that you can pay off the mortgage earlier than the length of time you agreed at the outset … or at least, not without incurring a charge.
So, flexibility is good – but make sure it’s not too one-sided in favour of the lender.
What Out … There’s a Fee About
Lenders have become truly canny in this highly competitive market and they now manipulate the mortgage comparison tables like high-class poker players. Many comparison sites base their ‘best mortgage’ advice results on interest fees, which is actually only half the ‘cost to the borrower’ picture. Lenders now impose a wide range of associated fees and charges, many of which are hidden amongst the terms and conditions – and these are not often shown in the repayment column of the same comparison tables.
This makes life somewhat tricky for the would-be borrower looking for the best deal, because comparing one product against another can take some time and a substantial amount of investigation. Using the comparison tables to narrow your search to perhaps ten of the best products available, then delving deeper to find the true cost of borrowing – is the best way forward.
The Best Time to Chose a Fixed Rate Deal
Personal requirements and circumstances aside, fixed rate deals become more attractive when interest rates are set to rise. Yeah, I know, tell me the obvious. But when interest rates are predicted to increase, that is exactly when fixed-rate deals disappear from the market, so it is worth keeping a very close eye on what is happening to bank base rates AND acquiring a fixed-rate deal quickly, when the opportunity is ripe.
When lenders start reducing the volume of fixed-rate deals or, alternatively, increasing the interest rates offered on them – get in fast, before they vanish off the shelves like lemmings over a cliff edge. We are entering a period of housing market recovery when interest rates are likely to start climbing and once the roller coaster begins, you may lose the chance of acquiring this type of mortgage at the most beneficial rate.One word of caution: Some fixed rate deals are currently slightly higher than the standard variable rate offered by lenders, but this will change once the market moves forward. It may be tempting to go for the variable rate option, as the repayments will be lower in the short-term. Your choice of whether to fix or not is likely to depend on your personal circumstances and whether you prefer certainty over the next few years – or whether you want to take advantage of excellent standard rates now, but risk paying more in a year or two.