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However, in 2014, interest rates started to tick upwards, leading to a shift towards lenders offering longer fixed term mortgages to attract borrowers looking to fix their interest rates before the next rate hike by the Bank of England (BOE).
Find out whether locking in your interest rate for the next decade is right for you.
Each month, the BOE sets the base rate, which is the interest rate set by the BOE for lending to other banks, and it is generally used as the benchmark for interest rates. This, as well as other economic factors, can have a bearing on what your lender decides to do with its mortgage rates.
If the rates go down, those with variable rate loans could see their repayments go down too; however, if rates go up, variable rate borrowers could be paying more. A fixed rate mortgage protects borrowers against rising rates. You lock in a rate with your lender, and then for the duration of that term, your rate stays the same.
A 10-year fixed rate mortgage means that the interest rate you pay on your mortgage will be fixed for the duration of the 10-year term. These are useful for those who want to have certainty on their monthly repayments and plan to live in the property they buy for a lengthy period and have no plans to sell or move.
Unfortunately, a side effect of this is that a fixed rate mortgage is less flexible and has extra fees compared to its variable rate cousin. In the case of long-term fixed mortgages, there are drawbacks. For starters, most lenders that offer 10-year fixed mortgages require a larger deposit, up to 50% of the property value. At the same time, the longer the term of the fixed period, the higher the interest rates and fees will be. This means your repayments may be more than someone with a two-year or three-year fixed rate mortgage.
They’ll also usually be missing features like 100% offset accounts. If they allow you to make additional repayments, these will usually be capped off at 10% of your mortgage balance annually, rather than unlimited like most variable rate mortgages.
An offset account works by using your savings to reduce the amount of your debt – and therefore the amount you’re paying interest on. If you link another account to your mortgage account, your mortgage balance will be reduced by the amount in the linked account, and you won’t pay interest on that amount. You can even continue to use the linked account to make withdrawals and deposits.
For example, let’s say you have a £250,000 mortgage with £10,000 sitting in an offset account. Instead of being charged interest on £250,000, your interest would be calculated on £240,000.
Fixed rate mortgages come in a variety of different types, each designed for people with particular needs, such as for people who are self-employed or who have bad credit. However, these may charge higher interest rates, so it’s always important to shop around to find the best deal.
This is your generic, structured process for financing a home. You get a mortgage for a set term, at an interest rate which is fixed for a certain period, and lenders require a down payment, which is usually between 5% and 20% of the property value.
Having bad credit can make getting a mortgage a difficult and stressful process. Luckily, many mortgage providers offer special mortgages for those with bad credit. You may be charged a higher rate or fee with this type of mortgage to compensate for your credit risk, but it doesn’t disqualify you from getting a mortgage.
Those who are self-employed or are investors are generally unable to provide proof of income through pay slips and bank statements like most people. Instead, self-employed borrowers will have to provide lenders form SA302, which is how you declare the amount of money you’ve earned to HMRC. This is why many lenders have special mortgages designed for those who are self-employed.
A 10-year fixed rate mortgage can be compared using the same factors as a regular mortgage, but there are a few additional points to consider.
Dennis and Kathy are both retired and looking to downsize from their four bedroom house to a ground floor flat, and use some of the proceeds from the sale of their current house to travel. They don’t plan on moving again and want a simple hassle-free mortgage that locks in their monthly payments and doesn’t require them to remortgage every few years.
Dennis and Kathy opted for a 10-year fixed mortgage.
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