If you have a mortgage and are considering whether to fix or looking to take out a mortgage to purchase a property, here are some items to consider.
Fixed rate mortgages accounted for 75% of all mortgages drawn down in the last three months. So if you are taking out a mortgage should you be looking to go fixed or variable and what are the costs and benefits associated with each. So I am going to talk through rates so if you are a mortgage holder and looking to switch or if you are looking to take out a mortgage should you be considering a fixed rate and why are most people fixing right now.
The main key point is that fixed rates are lower than variable rates so what that means is if you are looking at rates and comparing the cost of mortgage finance and the cost of repayments you will see that fixed rates are lower than variable particularly the 2, 3, and 5 year fixed rates that are on market at the moment. The lenders have reduced fixed rates over the last 6 months and hence the differential.
So should you be fixing? Fixed rates provided security over repayments so you know how much you repay during the fixed period. The downside is that obviously if rates decrease your rate will remain the same. Also you cannot overpay, in general, while you are on a fixed rate. So some lenders will allow limited overpayment when on a fixed rate and this is a key point to understand if you are choosing a fixed rate and feel you may have the means to overpay you need to understand if you lender will allow overpayment options or if you perhaps need to split your mortgage taking part fixed and part variable and overpay on the variable piece of the mortgage.
Another consideration with fixed rate is if you would have a penalty. So a penalty can apply with a fixed rate if you break out of that fixed rate contract. So for example if you have decided to fix for a three year period and two years into the mortgage you want to break out of the fixed period then you could have a penalty if you break out of the fixed rate contact. This is based on the cost of fund to the bank when you lock in versus when you break out by the amount of term left on the fixed rate term by the mortgage amount. You cannot understand on what that would be right now it would be based on the cost of funds when breaking out. The main thing to be aware of is that fixed only for a period that you are fairly certain is a reasonable period of time and that you wont be making any changes to the mortgage because if you break out of that fixed rate you could have a penalty.
So fixed rates are low they are tiered by loan to value with most lenders, <60% loan to value, 60-80% loan to value and >80% loan to value. The lower your loan to value the lower the rate. There are some really good fixed rates on market from the lenders and also the introduction of Avant Money this Autumn should mean that there are some lower fixed rates coming to market based on what they have advised so far. So a good time to fix, be conscious of what you are signing up for, it’s a fixed rate contract, there can be a penalty if you break out of it, you know what you are repaying each month, you don’t always have options in terms of overpayment so its really important to understand if your lender will allow you to overpay. If they do it has a massive impact on the overall cost of credit so being able to overpay while it might seem like a hope or dream at the start of the mortgage its really something that has a massive impact on the overall cost of credit on your mortgage so is something that everyone should look to do.
Those who have mortgages on variable rates or rolling off a fixed rate should really be looking to market and switching if their lender does not have competitive rates. So that’s a really important point, understand what rates your lender has to offer, what rate you want to move onto next whether its fixed or variable or a split rate and find out what’s best for your on market. At doddl we offer seven lenders under one roof so we have access to all lenders underwriting policy and rates and it’s the same rate you get via doddl as by going to the lenders directly. So if you have any queries in relation to interest rates, fixed or variable or what’s best for you be sure to give us a call at doddl.