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Getting a fixed rate mortgage is basically the same as taking out insurance against changes in your mortgage rate. The rate is fixed for a number of years, after which it reverts to the lenders standard variable rate. Between 50% and 75% of new mortgages in the UK are fixed rate.

You generally pay more for a fixed rate than a variable rate, but you might win out if the Bank of England puts up rates. On the other hand, if interest rates fall, then you might get frustratingly trapped in a higher rate mortgage.

Fixed rate mortgages almost always come with early redemption penalties, which can be very onerous – are you sure you are not going to need to move in the next two or five years?

So in general, if you feel you cannot afford an increase in rates, and are certain you want to stay in your house in the foreseeable future, then it can be a good idea to get a fixed rate mortgage so you know you can carry on affording it.

But if your mortgage payments are only a small part of your out goings or you might want to move again soon, then in general you will be better off getting a floating rate mortgage rather than a fixed rate one.

Finally, unless you fancy yourself as a great fortune teller, it is really not worth taking out a fixed rate mortgage as a sort of bet with the lender about future changes in interest rates, thinking you might win out. Doing that is basically a bet with the market professionals who set the rates, and they are more likely to win the bet than you.

What is the best length for a fixed rate mortgage?

If you do decide to go for a fixed rate mortgage to guarantee your mortgage costs, you need to decide the term of it – normally two, three or five years.

Five years gives greater certainty, and can be appealing for people in stable but financially stretched circumstances who want to minimise any financial risks. But a lot can happen to your circumstances in five years, and you may end up feeling trapped by it. Also, in five years your income may have increased, making any mortgage increases far more affordable.

Similarly, the huge expenses involved in moving house – such as buying furniture and building work – will normally be behind you after two or three years, giving you greater capacity for coping with changes in interest rates. So in general, if you feel two or three years fixed rate gives you the protection you need, it is better to go for that than five years.

by Cormac Henderson

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