A fixed rate refers to the means by which a payment (for our purposes a mortgage payment) is guaranteed over a given period of time. It is also the interest rate on a mortgage or loan or other liabilities that stays fixed for the entire duration of a loan or specified period. Having a fixed rate is very attractive to most borrowers who worry that the rate of interest might increase over the period of the loan, which could in turn raise their interest expenditure. With a fixed interest rate for instance, the borrower will avoid the various risks associated with interest rates that are variable or “floating”. In such a case, the payable interest rate on a specific debt will depend on a standard interest index or rate.
At a glance, fixed mortgage rates might look quite simple. However, it is advantageous to thoroughly investigate exactly how they work if you are thinking about getting a mortgage. A fixed mortgage rate is the best way to guarantee a consistent mortgage payment for a specific period of time.
Fixed rate mortgages are typically shorter in duration than other mortgages, mostly from 12 months to 10 years. Once the fixed rate phase has come to an end, the mortgage goes onto what is referred to as a variable rate, usually a typical tracker rate or the standard variable rate of that particular lender.
The fixed mortgage rate works in a number of ways. Over the fixed rate period, the monthly payments remain the same, regardless of the ups and downs of the variable interest. This way, you are still protected if rates begin to go up, but if the interest rates go down, you will be stuck paying more during the same fixed rate period. Normally, fixed mortgage rates come with early repayment charges for those who might want to repay their mortgage or remortgage within the first fixed rate phase. Lots of fixed mortgage rates allow the borrower to make overpayments of about 10 percent annually.
With a fixed rate on your mortgage or loan, you have a number of things to consider. For one, you will always know exactly what your next payment looks like for the specified period. In case there is a rise in interest rates, your payments will not change. Conversely, if the interest rates drop, do not expect your payments to; you could be paying more than others. The idea here is to ask yourself if you believe the interest rates will be going up any time soon before you try out a fixed rate mortgage.
Essentially, you will be able to guarantee your ability to pay your mortgage without any pressure since knowing your exact payments gives you a chance to plan and budget your finances properly and confidently. About 6 months prior to the end of your current fixed rate period, begin looking for other ideal mortgage deals around to save as much money as possible. Once the fixed rate period has come to an end, you will revert to the standard variable rate of the lender or what is referred as tracker rate, which hardly offers the same payment security and assurance that a fixed mortgage rate does. If you do not do something, changes in interest rates could have your payments making an abrupt jump.