Pros and cons of fixing your mortgage rate

Published:
23 January 2013
Topic:
News,Money,Mortgages

Lenders are busy launching some of the lowest fixed mortgage rates ever seen - but is now the right time to lock in your mortgage repayments?

The Funding for Lending scheme, launched last summer, has provided banks and building societies with cheap funds to lend with, prompting a flurry of new low-cost fixed rate offers.

The Post Office, for example, has just launched its lowest ever five-year fixed rate deal at just 2.89%. You need a deposit of 60% to qualify and it comes with a £1,495 arrangement fee.

The Post Office deal is not even the cheapest of its kind however, which is testament to how cheap fixed rate mortgages have become. But nevertheless think carefully before freezing your mortgage costs, and always read the small print as you could run into difficulties if you want to move during the fixed rate period.

Here, we examine some of the pros and cons of fixed rate mortgages, and take a closer look at some of the best deals currently available...

Pros of fixing

A fixed rate mortgage is the ideal choice for anyone who wants the security of knowing that their mortgage payments won't change, regardless of what happens to interest rates in the future.

Previously there has been a premium to pay for this peace of mind, but fixed mortgage rates have fallen in recent weeks so in many cases it is actually cheaper to go for a fixed rate deal than a variable rate deal.

David Hollingworth, at mortgage broker London & Country said: "Fixed rates have plummeted to such a degree that in many cases they carry a lower interest rate than some of the corresponding tracker deals. 

When there is no additional cost on rate for the security that a fix gives, there is little contest and many borrowers will be fixing.

"For example, Yorkshire Building Society offers a two-year fixed rate at 1.99%  with a £995 arrangement fee, for those borrowing up to 60% of the property value.  The lowest two-year tracker rate is Woolwich's 1.89% above the Bank of England base for two years, which gives a payable rate of 2.39%. This deal is available to those borrowing up to 70% of the property value, and has a £999 fee."

For those wanting to lock in for longer than two years, the current market-leading five-year fixed rate deal, however, is from Co-Operative Bank. Its offering is 2.79% fixed until February 28, 2018 and has a fee of £999.

The Post Office's five year deal is only marginally more expensive at 2.89%, although the fee is higher at £1,495. You need a deposit of 40% to qualify for this deal, or the equivalent amount of equity if remortgaging.

Other competitive fixed deals include Yorkshire Building Society's recently introduced two, three and five-year fixed rate mortgages at 2.49%, 2.69% and 2.99% respectively. Each of these deals has a £995 fee. 

Woolwich, meanwhile, the lending arm of Barclays, is offering a 2.89% three-year fixed rate if you can lay down a 30% deposit, with a fee of £499 for both first-time buyers and those looking to remortgage.

Cons of fixed rate deals

While many lenders are offering headline-grabbing rates, often these come with hefty arrangement fees, which can make deals a lot less attractive. For example, the Post Office five-year fixed rate mortgage has a hefty £1,495 fee, while Co-Op's fee on its five-year fix is £999.

However, on the plus side, if you are considering a longer-term fix, at least you won't have to pay any further arrangement fees for several years.

For those wanting a smaller mortgage, bear in mind that it can actually work out to be more cost-effective to opt for a higher rate, but with a much lower fee, or no fee at all.

If you decide to go for a longer term fixed rate mortgage, you must be certain you are planning to stay put in your existing property for the term of the deal.

While many fixed rate deals are transferable if you do move, you will need to effectively re-apply for your mortgage which may not always be as straightforward as it sounds.

Mr Hollingworth said: "What people have to remember is that, when it comes to transporting your current deal to a new property, you always have to meet the lender's criteria at that particular point in time. So, while your circumstances might not have changed, their lending criteria might have got much stricter, which means you may no longer be eligible to move your mortgage across."

If you find you can't transport your mortgage to a new property, your only option is to stump up any early repayment charges (ERCs) and to move lenders, or to stay put in your current property.

Remember too that even if you are allowed to move your fixed mortgage to a new property, if you need to borrow any additional funds, these are likely to be at a different rate which may not be so competitive.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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About This Author

Melanie Wright

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Financial journalist

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