Is A Fixed Rate Really The Best Solution When Remortgaging?

When you decide to remortgage your home, one of the decisions that you will have to make will be the type of product. The products available include fixed rate, discounted rate, variable rate and offset, but how do you know if the time is right to select a fixed rate?

As the UK recovers from recession, it seems obvious that interest rates are only going to move in one direction: up. So, taking a fixed rate mortgage might seem like a no-brainer. However, there are various different factors that you have to take into account and fixed rates may be less appropriate for your circumstances than you think. Our guide examines the advantages and disadvantages of fixed rate mortgages.

In the UK, between 50% and 75% or mortgages taken out are done so on fixed rates. Furthermore, when interest rates are predicted to rise, as with the current climate, fixed rates become even more popular.

One of the great things about a fixed rate mortgage is that you know exactly what your monthly repayments will be. The term of the fixed rate deal will usually be anything between 2 and 10 years, and the longer the fixed rate, the higher the interest rate will be.

For instance, if you agreed a mortgage loan at five per cent for five years, and the base rate set by the Bank of England doubled during that time, your mortgage would remain unaffected. The rate on your loan would not change, so the smart borrowers gamble that rates are going to rise..

On the other hand, if you fix your mortgage, it can result in substantially higher initial instalments. With the Bank of England Base rate at just 0.5 per cent, many property owners who have a 'standard variable rate' mortgage are currently paying just over 3 per cent interest on their loans. If you are going to gamble on the future and expect mortgages to rise of seven or eight per cent, it makes sense to fix your loans at five per cent, but initially it can prove to be expensive. Fixing a mortgage for five years at around five per cent would lead to a steep initial increase in repayments.

On a £200,000 interest only mortgage, a 2 per cent rise in the interest rate charged would cost an additional £333 per month. Of course, you could end up saving a considerable amount of money in the medium to long term, particularly if interest rates rise quickly. However, whilst interest rates remain low, you could actually be paying a 'premium' for the benefit of fixed repayments.

Fixed rate mortgages also offer less flexibility than discounted and tracker deals. This is because the vast majority of fixed rate products have 'early repayment charges'. If you repay part or all of your mortgage during your fixed rate, the lender will typically charge you a penalty which can be as high as six months repayments.

Some fixed rate mortgages may be portable, which means that you are able to move your existing mortgage onto a new property rather than redeeming it, but beware as some will still charge a hefty early repayment penalty, and although this can sometimes be added to the new property, you will be paying interest on the additional funds.

It may be tempting to only consider a fixed rate remortgage deal bearing in mind the prospect of interest rate rises. However, taking into account the relative lack of flexibility and the fact that your repayments may be initially higher, it is worth exploring all your options before you commit to a fixed rate remortgage deal.