Fixed mortgages are advantageous to homeowners when interest rates are low. A fixed rate mortgage is a mortgage that doesn’t have a fluctuating rate. In other words, no matter how the prime interest rate increases or what the Bank of England charges the local banks for the cost of borrowing, the fixed rate mortgages won’t increase in cost because you’ve locked in the interest rate.
At this writing, the Bank of England charges local banks 0.5 percent to borrow money. That amount has remained the same for 16 months. The banks make a profit by lending that money to you at a higher rate. Today, the UK banks are having a price war and lowering interest rates even though there’s a prediction that they will soon be rising.
Fixed mortgages are excellent if you take them out during times of a low interest rate. While others with adjustable rates watch their house payment sour out of sight as the prime rates for the banks increase, you’ll not see any difference in your interest rate with fixed rate mortgages.
Often in times of inflation, normally after a recession, you’ll start to see prices rise as people now rush to purchase the items they postponed. The more they purchase, the higher the price goes, according to the law of supply and demand. These increasing prices mean inflation. The government then steps in and increases prime interest rates to slow the inflation.
Fixed mortgages don’t change when interest rates increase. In fact, the payment, while it doesn’t actually become lower, often becomes a smaller percentage of the household budget. When prices increase, groceries go up, gasoline / petrol increases in price and often people receive a cost of living increase at work. Now, instead of using 25 percent of your available monthly money, your mortgage might only be using 23 percent, so inflation helps those with fixed mortgages.
Of course, during the same period that inflation hits, the Bank of England raises rates to slow it down. The people with adjustable mortgage rates now see an increase in the monthly interest they pay. Often, the rates increase to make their payment an even higher percentage of their spendable budget.
Fixed mortgages do have drawbacks. Often the interest rate is initially higher than that of adjustable rate mortgages making the initial payment higher than the payments of adjustable rate mortgages. The good news is that there are no sudden surprises when it comes to payments, unless you’re dealing with council taxes or insurance. You always know how much of your paycheck goes toward your housing toward your mortgage and unless your income drops, it remains affordable.
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