Stupid Question About Fixed Rate Mortgages

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Just how fixed does fixed-rate mean?

http://www.nationwide.co.uk/mortgages/interestrates-types/rates.htm

5.24% for 5 years followed by 3.99% SMR.

What does that mean? If it's a 20 year mortgage I will pay 5.24% for the first 5 years and then 3.99% for the next 15 years?

Is 'fixed' tied to interest rates at all?

The reason I ask is I'm assuming with interest rates set to go up soon enough, the best route would no doubt be a fixed rate.

Thanks.

[Mammon]

Just how fixed does fixed-rate mean?

http://www.nationwide.co.uk/mortgages/interestrates-types/rates.htm

5.24% for 5 years followed by 3.99% SMR.

What does that mean? If it's a 20 year mortgage I will pay 5.24% for the first 5 years and then 3.99% for the next 15 years?

Is 'fixed' tied to interest rates at all?

The reason I ask is I'm assuming with interest rates set to go up soon enough, the best route would no doubt be a fixed rate.

Thanks.

Sounds like the fix is for 5 years only.

The SMR is probably the standard variable rate and currently 3.99%, in five years time it could be much higher than 3.99%, you will have to pay whatever it is at the time, although you will be free to find another deal else where or with the same lender. If you cant find another deal then you will pay the going SMR rate until the end of your mortgage and the rate will vary over that period.

Edited January 18, 2010 by Mammon

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Do truly fixed rate deals exist then? Because even if house prices do fall – rising interests could soon see any potential savings be eaten away. There must be a happy medium between house prices and low interest rates – that’s when I want to pull the proverbial trigger.

For example for myself, a first time buyer, taking a 110k loan + 40k deposit over 20 years – the amount paid in interest could rise by 60k if interest rates rose from just 4% to 8%, let alone if they went higher. Therefore if there was such thing as a truly fixed rate deal – it might be cheaper to buy with low interest rates and high house prices rather than wait for the actual price to fall and risk a high interest rate.

[Mammon]

Do truly fixed rate deals exist then? Because even if house prices do fall – rising interests could soon see any potential savings be eaten away. There must be a happy medium between house prices and low interest rates – that’s when I want to pull the proverbial trigger.

For example for myself, a first time buyer, taking a 110k loan + 40k deposit over 20 years – the amount paid in interest could rise by 60k if interest rates rose from just 4% to 8%, let alone if they went higher. Therefore if there was such thing as a truly fixed rate deal – it might be cheaper to buy with low interest rates and high house prices rather than wait for the actual price to fall and risk a high interest rate.

20 year fixes were around a few years ago and maybe still around.

The problem with fixed rates is that there is usually a penalty to get out of them early (if there was no charge then people would constantly switch to lower and lower fixed rate deals as they became available).

So if you have to sell up early for some reason you will get hit with an early exit charge.

Even if you move house you can probably take the mortgage with you but if you need extra borrowing to move up the ladder and your current lender wont give it to you then to switch lender you will have to pay the charge.

So there is not much demand for very long term fixed mortgages and so not many products available.

Edited January 18, 2010 by Mammon

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I am suddenly more scared of interest rate rises than I used to be Will take this into consideration when considering mortgages and house purchases. Thanks.

[bug09]

Mammon has got it pretty mush spot on

5.24% for 5 years followed by 3.99% SMR

Just to add something to your original post, mortgage illustrations are given for the entire term (usually 25 years) even though the deal may only last a few years.  Interest rates will of course vary over that time, so to keep things straight forward it's accepted practice to assume today's BMR (Base Mortgage Rate, also referred to as SMR and SVR) and apply this for the whole of the rest of the mortgage.Note though that this is purely an illustration and does not imply that rates will remain at today's level for 25 years.  I think you've already understood this point, from what you say, but thought it was worth explaining the basis on which the illustrations are calculated.