Fixed rate mortgages guide

by Barclays Wealth International on October 26, 2010

An introduction to fixed rate mortgages by Barclays Wealth International.

What this introduction to fixed rate mortgages guide covers

This guide will introduce you to what is meant by a fixed rate mortgage and how to go about deciding whether it is right for you.

We also have guides on variable rate mortgages and foreign currency mortgages.

What is a fixed rate mortgage?

A fixed rate mortgage is one that charges a set interest rate for a minimum period of time. For example, the first two years of a mortgage might be on a fixed interest rate of 5%.

After the fixed rate period, the interest charged will usually be the mortgage provider’s standard variable rate (SVR).

Fixed rate mortgage options

Time period

In most cases the fixed term offered will be two to ten years, although in some cases longer terms may be offered. After this period the mortgage will probably be subject to the lender’s SVR.

Repayment structures

These apply to both fixed and variable mortgages. There are two main types, repayment and interest-only.

A repayment mortgage is one in which the monthly payments cover both the amount borrowed and the interest charged throughout the duration of the mortgage.

An interest-only mortgage does not pay off the capital borrowed, it only covers the monthly interest charges. While this may be appealing from a cash flow perspective, it leaves the borrower needing to take separate investment measures to cover the full repayment of the mortgage at the end of the term.

How much can you borrow?

While a guideline of four times annual salary is often used, the exact amount that can be borrowed is totally dependant on your circumstances.

The main advantage of a fixed rate mortgage

Stability is the main benefit of a fixed rate mortgage. With a fixed rate you know exactly what interest you will be charged and how much you are going to have to pay each month. This makes it much easier to budget your finances in advance.

In exchange for predictability you lose flexibility. If the interest rates fall you will not benefit from that change.

Early repayment charge

If you wanted to leave a fixed rate mortgage early then you would have to pay fees usually referred to as early repayment charges (ERCs).

These ERCs often mean that once you are in a fixed rate mortgage, it probably will be more cost effective to complete the fixed rate period and then change. Hence the importance of making the right choice of mortgage in the first place.

What type of mortgage is best for you?

Choosing which type is best for you depends on a number of factors including:

  • What you are comfortable with. If you prefer to know what to expect and be able to fix a budget in advance, then a fixed rate mortgage probably will suit you better
  • Interest rates. If you believe that interest rates will fall over the entire fixed rate period then a variable rate might be cheaper
  • Your financial capacity. If you are absolutely sure that you could cope with rising interest rates, then you might be better placed to take on an interest rate that is lower in the short term but unpredictable in the medium and long-term.

Important: The interest rate chargeable on your mortgage may increase at the end of a fixed or discounted period, so make sure you budget for this change. The credit crunch saw some severe increases and gave rise to the phrase ‘rate shock’.

The alternatives to a fixed rate mortgage

The main alternatives to a fixed rate mortgage are explained below.

Variable mortgages

The interest charged on a variable rate mortgage is based on the base rate set by the Bank of England i.e. the interest it charges when lending to commercial banks. So if the Bank of England puts the rate of interest up 0.5% then the amount of interest you pay on your mortgage will probably go up by 0.5% as well.

The interest rate on your mortgage will be several percentage points above the base rate, but exactly how much will vary according to your circumstances and which mortgage product you choose.

Standard variable rate

Most lenders will have their own standard variable rate (SVR) that is set a few percentage points higher than the Bank of England base rate. When the Bank of England moves its rate the SVR usually does the same but does not have to.

Discount mortgages

Discount mortgages apply during a fixed period, usually two to ten years, at the beginning of the mortgage. During this time the interest rate charged on the mortgage will be slightly lower than the lender’s SVR.

Tracker mortgages

A tracker mortgage is similar to an SVR mortgage. The main differences are:

  • The rate being tracked may be the Bank of England base rate or a different variable rate set by the lender
  • The tracker rate must reflect any changes in the rate it tracks
  • The tracker rate often applies to the full term of the mortgage
  • There may be greater flexibility for borrowers enabling them to vary how much they pay each month.
    • Application or Arrangement fee. This is the up front administration cost charged by the lender
    • Valuation fee. To confirm the value of the property you are buying. You may also choose to have a more detailed survey undertaken in order to establish more information about the condition of the property. This is especially recommended for older properties
    • Early repayment charges. This might be charged if you repay the loan early during the fixed term of some mortgages
    • Final repayment fee. Also referred to as the ‘exit fee’. This charge covers the administration costs of closing the mortgage and handling the associated legal documents.
    • Reminder of terms used

      Base rate. The underlying interest rate set by the Bank of England.

      Rate shock. This is the term used to describe a particularly steep rise in interest payments that may be incurred at the end of a fixed or discounted period.

      Standard variable rate (SVR). The interest rate a lender will charge on a mortgage before any discounts are taken into account. The SVR is usually several percentage points higher than the Bank of England base rate.

      YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

      For more information or to apply

      To apply or find out more information, speak to a Barclays Wealth International Mortgage Adviser. They specialise in providing fixed rate residential and investment mortgages for property purchases in the UK, Jersey, Guernsey, Isle of Man and Gibraltar.

      Call us on +44 (0)1624 684305

      Visit the Barclays Wealth International website.

      – – – –

      If your loan is denominated in a currency other than sterling CHANGES IN THE EXCHANGE RATE MAY INCREASE THE STERLING EQUIVALENT OF YOUR DEBT.

      Terms and conditions apply to all mortgage products. We strongly recommend that you obtain your own independent tax advice before proceeding with an offshore mortgage.

      Barclays Wealth will require a first charge over the property.

      Barclays Wealth is a responsible lender and when considering your application for borrowing, your financial circumstances will be appraised. Remember should you run into difficulties please contact us immediately.

      In all forms of advertising and marketing material where repayments are quoted, we will show clearly a typical Annual Percentage Rate (APR). We will also clearly indicate in all lending-related advertising issued in Jersey that we abide by the Code of Practice for Consumer Lending.

      Lines are open 7am to 8pm weekdays and 8am to 5pm weekends and UK bank holidays, local time. Call charges may vary. Please check with your local telecoms provider. Calls may be recorded for training and security purposes.

      The products and services described on this page are provided by the following companies, which are part of Barclays Wealth: Barclays Bank PLC in England and Wales, Barclays Private Clients International (Gibraltar) Limited in Gibraltar and Barclays Private Clients International Limited in the Isle of Man, Jersey and Guernsey. For further information on these companies and Barclays Wealth please read the Important Information.

  • Offset mortgages

    An offset mortgage is one in which the borrower’s entire borrowings and savings are taken into account. For example if the borrower has a mortgage of £100,000 and savings of £10,000 then they will only be charged interest on £90,000 i.e. their net borrowings.

    The borrower will not earn any interest on savings and will have to have all savings and mortgages with one provider for an offset mortgage to be worthwhile.

    Mortgage fees and charges

    There are various fees and charges that you will incur during the lifetime of a mortgage. These include:

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