Fixed rate mortgages are the most common, and the least risky, mortgage choice. As the name suggests, having a fixed rate mortgage means that you pay the same amount each month towards the principal, over the agreed-upon period of time.
Many homeowners choose fixed rate mortgages so that rising interest rates won’t affect their monthly payments. Additionally, a fixed rate mortgage offers easier planning for monthly expenses. Often, fixed rate mortgage plans last two to three years, but you can also get longer ones that last five to ten years.
Although fixed rate mortgages seem simple enough, there are some things to consider when choosing a mortgage, specifically what kind of penalties you may incur with a fixed rate mortgage. Fixed rate mortgages tend to be inflexible, and there are two main types of penalties you can incur…
Early Redemption Penalty
You may be subject to an early redemption penalty if you pay off your mortgage earlier than agreed upon. You may also have to pay an early redemption penalty if one of your repayments exceeds your overpayment allowance.
Early Repayment Charge
Many lenders include extended tie-in periods with fixed rate mortgages. This means that even once your mortgage period has ended, you must keep your mortgage with the same lender for a specific period of time. If you try to switch lenders, you will be subject to an early repayment charge.
You will also have to pay an early repayment charge should you try to get out of your current mortgage, for instance to switch to a different lender, or if you are selling your home. Your early repayment charge will usually be about 3-5% of your original loan.
Overall, a fixed rate mortgage will penalize you more harshly for exiting the mortgage before the agreed upon date. The penalties can be very costly, and often the wording in the contract is confusing, especially to first-time homebuyers. If you want more flexibility in your mortgage, a variable rate mortgage may be a better choice for you. While there is less predictability involved, a variable rate mortgage typically offers more options for homeowners when it comes to ending a mortgage or making repayments.
Choosing which mortgage solution is right for you can be downright confusing. Fortunately, our highly trained, professional mortgage consultants are here to help you with all of your mortgage questions and concerns! Please, contact us today to set up a consultation!