Taking out a fixed rate mortgage can offer borrowers peace of mind, as the interest rate stays the same for an agreed period.
Read on to find out how they work, as well as the pros and cons of taking out this kind of mortgage.
A two-year fixed rate mortgage is a mortgage where your payments are guaranteed to be the same every month, for two years.
When taking out a mortgage, the loan will be divided into two parts, capital and interest. Capital is the bulk of the loan, used to buy your home and the interest is the amount the lender charges for loaning you the money. Interest charged over a fixed period remains the same with this mortgage type. Your lender will also have a standard variable rate, which moves in-line with the Bank of England base interest rate. This may not affect those on fixed rate mortgage deals, until the set payment period ends.
Affordability is the key point to consider when taking out any kind of fixed-rate mortgage plan. Borrowers need to ask themselves if they can afford to pay the same amount every month, despite any unexpected changes to their household budget?
Lenders offer 2-year fixed rate deals as a means of incentivising new borrowers to take up a mortgage with them. When applying however, you are agreeing to pay off the capital and interest within 25 years (although some mortgages can be extended to 30 years). The two years, refers only to the rate you pay for that set length of time. When the two years is up, you may be automatically switched to the provider’s standard variable rate, which can rise and fall intermittently.
At the end of the two years, you may decide to switch deals with the same lender, or choose to remortgage with another bank or building society. Exiting the fixed-rate deal early may result in you having to pay a few months’ worth of interest payments as a penalty. You may also have to pay to take out a new mortgage product. Find out more about the cost of taking out a mortgage in our Guide for First Time Mortgage Applicants.
Jack and Kelly are first time buyers looking to get a home together. They have scrimped and saved for a long time and have a £20,000 deposit to buy a £200,000 property with a 90% Loan to Value mortgage. They have found a two-year fixed rate deal of 2.5%, however there are set-up costs. Jack found an alternate 2-year fixed rate mortgage for 2.99% interest, with no up-front fees. Jack and Kelly have very little spare cash to cover the cost of moving, so opt for the mortgage with the slightly higher interest rate. As they are choosing to fix for a short period, they will look to remortgage in two years.
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
IF YOU ARE THINKING OF CONSOLIDATION EXISTING BORROWING YOU SHOULD BE AWARE THAT YOU MAY BE EXTENDING THE TERMS OF THE DEBT AND INCREASING THE TOTAL AMOUNT YOU REPAY.
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