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# What is a fixed rate mortgage?

For most people, getting a mortgage is one of the most important financial decisions in their lives. When you start to look for the best mortgage, you will see hundreds of mortgage products with different names and associated mortgage deals and interest rates. As a borrower, it is important that you understand the different types of mortgages so you can choose the mortgage that is best suited for you. In this suite of mortgage guides, we look at the different type of mortgages available in the market.

In this mortgage guide, we will focus on fixed rate mortgages.

A fixed rate mortgage is a 'type of mortgage' that is based on interest rates.

## Fixed rate mortgages

The interest rate on fixed-rate mortgages remains fixed over a specific period of say 2 years or 5 years, this is also referred to as the 'fixed rate term'. Typically, you will see the term of mortgage in the product's name.

Example 1: Some examples of fixed rate mortgages are Chelsea Building Society 2-Year 1.38% Fixed mortgage. As you can see from the name, this mortgage charges a fixed interest rate of 1.38% for a period of 2 years. Other examples of fixed rate mortgages are Yorkshire BS Flexi 2 Year 1.39% fixed, Post Office 2 Year 1.43% Fixed and HSBC 2 Year 1.49% Fixed Special.

At the end of the term, the mortgage moves to a standard variable rate, this is normally higher than the fixed rate of interest though can on occasion be lower if the Bank of England interest rates have reduced since the mortgage product was taken. For instance, after two years the interest rate on the example deal from Chelsea Building Society above is 5.45% for the rest of the term.

### Advantage of fixed rate mortgages

• Monthly payments remain the same over the entire loan term, which helps is much better for flat household budgeting. For example, for a 2-year 1.38% fixed rate mortgage, the monthly payment will be fixed at £10,568.16 every month for 2 years giving you certainty for planning your finances to pay your monthly mortgage repayment and calculate how much remains for other household spending.

### Disadvantages of fixed rate mortgages

• Typically, interest rates on fixed rate mortgages are higher when compared to variable rate mortgages as the mortgage lender builds in a tolerance for potential increases to their mortgage standard variable rate so they don't lose out too much if rates do go higher.
• If there is a fall in interest rates, there is no benefit for you.
• If you want to make an early repayment and exit your mortgage, you will have to pay an extra charge, which could be 1% or 2% of the total loan amount.