Fixed Rate Mortgages PDF

Terms for subsection: B. Fixed rate mortgages Term: 01. Fixed rate mortgages Most lenders offer fixed rates Provide guarantee that rate will stay fixed for a defined period Gives borrower certainty about mortgage payments Might be important if finances are tight following purchase of a new home Some...

Terms for subsection: B. Fixed rate mortgages Term: 01. Fixed rate mortgages Most lenders offer fixed rates Provide guarantee that rate will stay fixed for a defined period Gives borrower certainty about mortgage payments Might be important if finances are tight following purchase of a new home Some lenders will offer an attractive fixed rate for a short period, 2 years for example, and then the rate reverts to standard variable rate Often done as a ‘loss leader’ to get new business Some lenders specify a time period that the borrower must stay with the lender after the end of the fixed rate For example, for a period of 2 years after fixed rate has ended Otherwise a penalty charge is applied, a ‘tie-in’ It is usual for customer’s to look for a lender who’s early repayment charge ties in with the end of the fixed rate Rather than having an overhang beyond the end of the fixed rate Fixed rates are often offered for a limited period To tie in with the lender having raised a certain amount of money at a fixed rate and lending this until the funds runs out Arrangement fee usually charged for a fixed rate May or may not reflect dealing costs Borrower should consider the following before taking a fixed rate: Future trends in rates – which way they will move and by how much How their own disposable income may change, if it is likely to be variable, stagnant or slowly increase a fixed rate may be useful Will they be able to get another fixed rate at the end of this one Early repayment charges and whether these apply after the end of the fixed rate Recommended Reading: Santander - Types of mortgage MoneySuperMarket - What is a fixed rate mortgage? John Charcol - Best fixed rate mortgage/remortgage options Nerdwallet - Compare Fixed Rate Mortgages Term: 01. Fixed rate mortgages (2) Variable rate mortgages tend to be cheaper than the fixed rates on offer at a specific time but in the long run the fixed rate may be better Depends on what the customer can afford and views on the factors detailed on the preceding page A fixed rate mortgage normally has an early repayment charge if the mortgage is redeemed during the fixed rate period Sometimes applies for a period after the fixed rate has expired If a borrower ends up on a fixed rate that is higher than available variable rate they need to decide whether to continue with the fixed or pay the charge to exit the deal Most fixed rates can be transferred over to a new mortgage, with the same lender, if the borrower moves home and is happy to continue with the same lender Lender may offer a new fixed rate when the current one expires When assessing an application for a fixed rate mortgage the effect on payments once the fixed period ends must be taken into account As committed expenditure Can be difficult to assess as interest rates will vary during period of fix When a fixed rate deal ends some borrowers have found it difficult to agree a new deal MCOB rules on affordability mean that an existing borrower is not certain to get a new application agreed Particularly as living costs may have increased / income reduced since original mortgage arranged Applicants have even been declined when payments would actually reduce under the new contract Known as 'mortgage prisoners' Recommended Reading: Santander - Types of mortgage Which? - What is a fixed rate mortgage? Moneyfacts - Best fixed rate mortgage Nerdwallet - Compare Fixed Rate Mortgages Term: 02. Mortgages with a cap and/or collar Mortgages with a cap and/or collar A capped rate mortgage guarantees that the pay rate will not to exceed an upper threshold for a fixed period The ‘cap’ Can also be ‘collared’ meaning the rate will not fall below a specific lower level The two can be applied together giving a lower and upper rate limit for a specific time Capped rates without a collar are usually better than fixed as there is a maximum rate but the customer can benefit from rate decreases Borrower should also check that rates will reduce at the same rate as standard variable or higher rates Administration fee usually charged for arranging and early repayment charges may apply As with fixed, discounted mortgages it is important, at application stage, to confirm that payments remain affordable when cap / collar ends Recommended Reading: Capped Rate Mortgages Propillo - Capped Rate Mortgages - Mortgage Guides - Propillo MoneyHelper - Different types of mortgage Nerdwallet - Types of mortgage Cap and collar mortgages Mortgage Connections - Cap and Collar Mortgages