What is a fixed-rate mortgage?

A fixed-rate mortgage is a home loan whose interest rate remains the same for a set period of time. This means that the borrower pays the same amount each month, regardless of any fluctuations in the benchmark interest rate set by a country’s central bank.

Fixed-rate mortgages are different from variable-rate mortgages or adjustable-rate mortgages, which can go down or up in relation to the central bank’s base rate, or the lender’s standard variable rate.

A fixed-rate mortgage may be set for two, five or even up to thirty years. When the agreed period comes to an end, and money is still owed, the lender will usually transfer the borrower automatically onto its standard variable rate (SVR).

Fixed-rate mortgages make it easier for households to plan their finances.

Advantages of a fixed-rate mortgage

Many borrowers prefer this type of loan because of the ‘peace of mind’ it brings. If you know exactly how much you are going to have to pay out this month, and in the months to come, regardless of what happens in the country, it is easier for you to plan.

Fixed-rate mortgages allow household to plan ahead and budget more easily. They are less likely to be tripped up by unpleasant surprises.

If you are on a tight budget and need the certainty and predictability of a fixed monthly payment, this type of loan may be the right choice for you.

Disadvantages of a fixed-rate mortgage

If inflation drops dramatically, or other factors in the economy persuade the central bank to reduce interest rates, you may be paying a higher rate than other mortgagors (borrowers) on variable-rate mortgages. In times of very low interest rates, your monthly payments will not drop.

Because they are very conservative and the borrower is guaranteed a set monthly installment amount, the overall interest rate may be higher compared to other types of home loans.

Borrowers may have to pay arrangement fees when setting up a fixed-rate mortgage. They will probably also face early repayment charges if they decide to change the terms in the fixed-rate deal before the contract has expired.