Choosing the best fixed rate mortgage, 2,5,10 or more years. Which is best for you?
If you like the idea of knowing how much you’ll pay each month a short-term fixed rate mortgage lasting 2 or 3 years, or a longer-term fixed rate mortgage over 5 or 10 years will give you piece of mind. Our mortgage team is more than happy to help if a fixed rate mortgage is right for you. GHL Direct mortgage advisors are very flexible and offer appointments over the phone, via video call or face to face from 08:00 - 20:00.
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The importance of affordability
For most of us, buying a home will be the biggest financial decision we’ll ever make.
When finding a mortgage product that will meet your requirements, both your income and outgoings will play a part.
The EU Mortgage Credit Directive of 2015 introduced stricter lending criteria, which led to mortgage lenders having to take greater steps to check affordability – including on remortgages.
These rules require your lender to check you can afford your repayments, both now and in the future. To do this, they will need information about your income and outgoings. You will have to inform them if you expect your income and outgoings to change in a way that means you’ll have less to spend on your mortgage repayments. You will also need to provide your mortgage lender with evidence of your income.
Fixed Rate Mortgages
Before you choose a specific fixed rate mortgage deal, you need to decide how much you can safely pay each month and which is the most appropriate for your needs.
If you like the idea of knowing how much you’ll pay each month a short-term fixed rate mortgage lasting 2 or 3 years, or a longer-term fixed rate mortgage over 5 or 10 years will give you piece of mind Fixed rate mortgages have lots of benefits, the most important being that your monthly payments won’t change. So, even if interest rates go up, your payments will stay the same for the duration of the fixed period. This can provide valuable budgeting certainty, as you’ll know exactly how much you’ll have to pay each month.
There will usually be Early Repayment Charges (ERC’s) to pay if you leave your fixed rate mortgage deal early. That means when choosing how long you want your fixed rate to be, you’ll need to think carefully about whether your circumstances are likely to change. Contact us if you want advice about the different fixed rate options that are available to you.
When your fixed rate mortgage ends, you’ll usually move onto your lender’s standard variable rate (SVR) unless you remortgage to another fixed rate or another mortgage deal.
Most fixed rate deals are portable if you move house during the fixed rate period, but you’ll need to meet your lender’s criteria at the time, and if you need to borrow more, this is likely to be at a different rate.
It is possible to get a 1 year fixed rate mortgage, although this length of fixed rate deal isn’t always available. Most fixed rate mortgages run for 2, 3, 5 or 10 years or sometimes longer.
Mortgage Lenders will typically calculate mortgage interest on a daily basis, rather than using the old annual interest rate method. Calculating interest daily is a fairer method as it takes immediate account of any capital payments made.
The two most common ways of repaying your mortgage are capital repayment and interest only.
On a repayment mortgage, your monthly payments will partly go towards repaying the interest accrued on the money you’ve borrowed and partly towards repaying the capital sum (i.e. the amount you borrowed).
The benefit of capital repayment is that you’ll be able to see your outstanding mortgage reducing each year (albeit very slowly in the early years), and you are also guaranteed that your debt will be repaid at the end of the mortgage term, as long as you keep up your payments. On a capital repayment mortgage, the shorter the term you pay your mortgage over the bigger your monthly payments will be.
By having a longer term, you may benefit from a lower monthly payment, but you will also pay more interest to the lender over the mortgage term.
Capital repayment is the most common way of repaying your mortgage.
Interest Only Mortgage
For an interest only mortgage, your monthly payments will only cover the interest on your mortgage balance. The capital you owe (i.e. the amount you borrowed) will not go down and you will need to repay this in full at the end of your mortgage term. This means you will need to make a separate investment or combination of investments to generate the capital required, and you will also need to prove that you can afford to do this.
You should bear in mind that the value of investments can go down as well as up and you may not get back the original amount invested. For an interest only mortgage, the lender will need to see your plan for repaying the loan when the interest only period ends. If you fail to generate enough to repay your mortgage by the end of the mortgage term, you may be forced to sell your property.
With an interest only mortgage, you must be able to demonstrate how you will repay the capital sum at the end of the term.
It’s easy to underestimate the mortgage costs involved when buying a property.
Lenders may ask you to pay a valuation fee. The type of valuation you choose will depend on factors such as the age and condition of the property.
These are the costs your lender will charge you for arranging your mortgage. Some lenders will allow the fee to be added on to your mortgage, but this means you will be charged interest on it over the mortgage term.
The fees charged by a solicitor will include their conveyancing fee (i.e. for the transfer of land ownership), as well as charges for legal registrations and other miscellaneous costs (known as disbursements) such as local search fees and Land Registry fees. Some lenders may offer to finance some or all of your legal costs as an incentive.
If the amount you wish to borrow is greater than a specified proportion of the property’s value (typically 75%), you may incur a higher lending charge.
Lenders may charge an ERC if you make an overpayment in excess of any stated limit, if the loan is repaid early or if you remortgage during the early repayment period. This can amount to a significant cost, so you should always check the early repayment terms in the offer letter from your lender.
Lenders may charge a fee to release the deeds of a mortgaged property to you or a new lender.
Before we get started, we will explain how we will be paid for arranging your mortgage if it all.
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Your home or property may be repossessed if you do not keep up repayments on your mortgage.