Payments for your mortgage loan depend on several factors, the most important of which is the Bank of England Base Rate. This is set by the Monetary Policy Committee (MPC), and it affects the rates that banks can offer their customers for mortgages. The MPC meets monthly to determine the base rate, and it can often fluctuate wildly based on national and international market forces. Additionally, the rate is raised to discourage inflation, and lowered to encourage consumer spending.
Fixed rate mortgage is the way to avoid dependence on these fluctuations. First of all, as the its name implies, the rate stays the same throughout the fixed rate period.It provides security from base rate increases: if you research the market and feel that the base rate will be going up, you can choose a fixed rate mortgage that will keep your interest rate the same throughout the lending period. Fixed rate mortgage features a payment that remains the same each month, making it easier to plan your finances.
The interest rate of a fixed rate mortgage is calculated based on a few variables. These include the base rate and the length of the mortgage term you are negotiating. Some banks offer up to ten-year terms, but standard terms range from about six months to five years. Put simply, the longer you want your rate to remain the same, the higher that rate will be.
This is because the bank is taking a risk that the base rate will rise dramatically during this time, which means that they could start losing money on your mortgage. The opposite is true for you – by taking a fixed rate mortgage, you are keeping yourself safe from rate increases. However, if the base rate drops dramatically you could end up paying more interest than if you had chosen a mortgage that has a variable interest rate.
