Fixed rate mortgage, why choose it? pros and cons

Not all mortgages are the same. While some choose adjustable rate mortgages, the most popular type of loan by far is the fixed rate mortgage. This type of mortgage gives you peace of mind knowing that you will pay the same amount every month. It's a very simple mortgage because you know how much it will cost in the end. Yet even with fixed rate mortgages, there are a number of options. Read on to find out everything you need to know about fixed rate mortgages and which type might be best for you.

What is a Fixed Rate Mortgage?

How fixed rate mortgages work

The interest rate applied to the fixed rate mortgage, i.e. the nominal rate, is given by the sum of the reference index for this type of loan, i.e. the Irs (or Eurirs), and the spread, i.e. the increase applied by the bank as its profit margin.

Once their value has been established in the loan agreement, both will remain unchanged until the end of the loan, therefore the interest rate will also remain fixed.

If the spread is established by the individual banking institution, the IRS is instead determined daily by the European Banking Federation, based on the expectations of the financial markets.

There is no single IRS rate, but the one relating to the length of the single home loan must be chosen: for a 5-year loan, the bank will consider the IRS 5 years, for a 20-year loan the IRS 20 years. There are Irs for all main terms, from 1 to 50 years.

In summary, therefore, a mortgage that lasts 15 years will have an interest rate made up of 15-year Irs spread, while one that lasts 30 years will have a rate made up of 30-year Irs spread, and so on.

In addition to the interest rate, the type of monthly payment must be chosen, which can be constant, increasing or decreasing.

Each installment always consists of a capital share and an interest share, in variable proportions depending on the case, but it is important to reiterate that all amounts are defined from the beginning of the mortgage.

The constant installment is by far the most widespread, according to the "French" amortization plan: in the case of a fixed-rate loan and constant installment, the sum to be repaid to the bank is divided into all equal monthly amounts, with the principal which grows progressively, while the interest rate decreases accordingly.

The decreasing installment, or "Italian-style", is instead given by a constant principal quota and an interest quota which decreases over time.

Finally, the increasing installment provides for an increasing amount on the basis of deadlines established by contract.

Pros and cons of a fixed rate mortgage

Let's look at some advantages and disadvantages of the fixed mortgage.

What are the pros of fixed rate mortgages?

There are a number of obvious pros to a fixed rate mortgage, including:

The interest rate you pay will stay the same for the length of the fixed rate term, regardless of what happens to the interest rates. You can choose how long the interest stays the same by choosing a two-year, three-year, five-year, some lenders Credit also offer a ten-year fixed term. Knowing how much your mortgage will cost you over a specific period of time can offer security and peace of mind. For this reason, fixed rate mortgages may be an especially good idea for new buyers or homeowners using mortgages for a new property with associated, yet unknown costs. Since lenders compete over the interest rates they offer on their With fixed rate mortgages, you can take advantage of some great deals. Since the interest is calculated on the total amount outstanding, you end up paying most of the interest at the beginning of the mortgage. By fixing the interest rate for the first two to five years, you could make big savings.

What are the benefits of a long term fixed rate mortgage?

One of the overlooked benefits of a fixed rate mortgage (especially if it's a 10-year fixed rate) is that, under the right circumstances, you can use the fixed rate term to plan for the full repayment of your mortgage. With good financial planning, it may be possible to take advantage of competitive rates to ensure that your mortgage is paid off within the term.

What is the maximum benefit of a fixed rate mortgage

For many borrowers, the ultimate benefit of choosing a fixed rate mortgage is the peace of mind they can bring.

Knowing the exact cost of your mortgage over a given period of time brings with it a degree of financial security that could not be achieved with an adjustable rate mortgage.

Are fixed rate mortgages a good idea for me?

The amount of deposit you have available, the amount you need to borrow, and your overall income and mortgage affordability will all play a part in how easily you are secured a fixed term mortgage at the most competitive rate.

Because of the sometimes expensive set-up fees and the inflexibility associated with fixed rate mortgages, if you're looking for a relatively small mortgage, you may find it more cost-effective to choose a higher rate, but lower fee.

To find out if a fixed rate mortgage is a good idea for your circumstances, talk to one of our credit counselors.

Call us immediately on 06 94802955 or send us your request here.

Our credit advisors have all the experience of the market and will be able to help you evaluate the advantages and disadvantages of a mortgage based on your financial situation.

What are the cons of fixed rate mortgages?

It is important to familiarize yourself with the potential cons of a fixed rate mortgage before taking out a mortgage and weigh them against the benefits.

Expensive deal fees – while lenders brag about their low interest rates, what they aren't so eager to tell you about are the expensive deal fees that can take some borrowers by surprise. If you're taking on a five-year term, these costs may be worth swallowing, but beware of expensive costs on two- or three-year term mortgages as the attractive interest rate could be canceled out if the associated fees are inflated.Loss of Flexibility: One of the major disadvantages of a fixed rate mortgage loan is the loss of flexibility. If you take out a fixed term mortgage, you should be as certain as possible that you will remain in your existing property for the length of the fixed rate term. While fixed-rate mortgages are transferable, actually making a transfer can involve some high costs since you'll actually have to reapply for your mortgage. Prepayment Fees: If you have a fixed-rate mortgage and want to make changes, from prepaying your mortgage to abandoning your mortgage for a different mortgage or even requesting an increase in the amount borrowed against the loan, you will need to factor in any costs of a prepayment penalty which vary from lender to lender, but it's usually charged as a percentage of your outstanding debt and often reduces over time. You'll Lose If Interest Rates Go Down: If interest rates go down while you're on a fixed-rate mortgage, your rate will stay the same. Worst-case scenario, you could end up overpaying for months or even years. Unattractive Terms When Fixed Rate Expires: Beware of fixed rate loans that extend beyond the fixed term period. Some lenders may apply terms to seemingly attractive fixed rate mortgages that can be extremely expensive and prohibitively expensive. For example, you may automatically get locked into your lender's uncompetitive floating rate after your term expires. This is why most experts recommend buying a mortgage 2-3 months before the fixed rate period ends. This is usually called extended surrender penalty.

What is the advantage of a fixed rate mortgage over an adjustable rate mortgage?

The main advantage of a fixed rate mortgage over an adjustable rate mortgage is knowing exactly how much your mortgage will cost each month for a given period.

With an adjustable rate mortgage, the interest rate, and therefore the monthly mortgage payments, can and will fluctuate throughout the life of the mortgage. If interest rates rise you may end up paying more on an adjustable rate mortgage.

Since interest rates can fluctuate on a daily basis when you have an adjustable mortgage, it can feel like a bit of a gamble. Under the best of circumstances, you could end up saving on an adjustable mortgage, but if interest rates rise, you could end up having to pay really high interest, which could come as a nasty surprise if you're not prepared.