Fixed- Rates At Least Offer Some Protection If Interest Rates Do Rise

Category: Finance, Mortgages.

The Council of Mortgage Lenders( CML) reported in April that almost nine out of 10 first- time home buyers chose a fixed- rate mortgage loan in February.

But how safe is a fix- rate mortgage? Its report added to reports that record numbers of first- time buyers were taking up fixed- rate mortgages amid fears that interest rates will continue to rise. Fixed- rates at least offer some protection if interest rates do rise. The CML said: "With the chance of at least one more interest rate rise this year, first- time buyers are taking the sensible option in taking out fixed rate deals, and locking into the payment security they provide. " Soaring house prices, mean first, especially in London- time buyers are having to save even harder for a deposit. However, buyers shouldn t be easily persuaded by the low rates of interest alone and should consider all the other costs of a new mortgage. Nationwide said last week that the average price paid by first- time buyers in the UK had increased from �131, 903 in April 2006 to �145, 801 in 200 That means a first- time buyer today would have had to find almost �700 extra for a 5 per cent deposit as the house prices have increased by a massive 10 per cent. Borrowers should look out for higher lending charges.

New homeowners need to know exactly how much their monthly repayments will be so they can budget, which is why fixed rates are becoming increasingly popular. These are fees imposed by a lender when the amount borrowed exceeds a given percentage of the value of the property. The fees can also be as high as 5 per cent of the amount borrowed. Those with a small deposit are often affected the most as the charge usually applies when borrowing more than 90 per cent of a property s value. However, not all fixed- rate mortgages come with high fees and there are other issues to be addressed such as the guarantee that interest rates elsewhere won t lower. It is not only first time buyers who may be considering a fixed mortgage rate and some of those looking at a remortgages may also be interested.

Also borrowers should know if they will actually be able to commit to paying off the mortgage for the fixed term. For example, The Nationwide Building Society recently became the UK s first mortgage lender to launch a 25- year fixed- rate mortgage deal at the 49 per cent rate. Louise Cuming, head of mortgages at price comparison website moneysupermarket. com, said: "The Nationwide offering is an interesting variation on the fixed rate mortgage- but can it conquer where others failed? The deal comes with a low arrangement fee of just �599 but will not charge a redemption fee after the first 10 years. It s very risky for people to commit to a single product with one lender for such a long time when nothing in the future is guaranteed. "Unless you have a crystal ball to foresee your own situation and future interest rates, it is ludicrous to allow yourself to be tied into a contract for this length of time- even though the product boasts no early redemption fees after 10 years. I would urge people to look elsewhere for peace of mind- there are plenty two and three year deals on good rates. Not only this, but interest rates are expected to start reducing next year, so it makes no sense to commit now to what is potentially a high rate of interest. "It strikes me as a clever marketing ploy to maximise customer retention by taking advantage of people s desire for security .

But, if a longer term fix is required with a get out clause after 10 years, better options are available. " While fixed- rate mortgages may seem to be borrower s way around forking out hundreds of pounds with rate rises, it is an agreement that must be entered into with caution and you must be very positive that your financial situation will either stay the same or improve. These comments may also be on interest to those looking at remortgages.

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