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Fixed Rate Mortgages During Economic Downturn

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by: No more debt !
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Date: Tue, 10 Nov 2009 Time: 10:40 PM
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Following a period of 18 months of economic downturn, the housing market is beginning to recover with the number of outstanding mortgages rising by 1% during the 2nd quarter of 2009 compared to the same period of 2008. These figures show that the number of people borrowing money from banks and building societies is on the rise. Out of the many types of loans available from banks and building societies, one of the most popular loans is the fixed rate loan. This type of loan now represents 16% of all loans taken out for property purchases in the UK.

Unlike many other mortgages, the interest rate on fixed rate mortgages does not change during the term of the loan; they can also run over various lengths of time like any other loan.
The term of this type of bank loan is often limited to a shorter period than mortgages with variable interest rates. This is due to the fact the lender wants to limit the risks he is taking with the interest rates to a minimum.

Fixed rate mortgages are currently the type of loan that borrowers prefer to take out because the fixed rate makes it a secure mortgage. The loan is not subject to any variations in interest rate, even when there are variations in rates. This means the borrower pays back the same amount throughout the entire term of the loan. The borrower will therefore have to repay the same amount back each month.

Even though the initial repayment charges maybe higher than throughout the rest of loan, fixed rate mortgages are also more secure for the lender as the borrower is more likely to repay the loan as the fixed interest rates mean that the borrower will always pay the same amount each month.

The first repayment charges on longer term loans with fixed interest rates (between 5 and 10 years) is often more expensive than the following ones because the lender needs to cover the risk they are taking with the interest rates. That is why fixed rate mortgages are only available over a shorter period of time than mortgages that have a standard variable interest rate.

However, in most cases, the lender may want to impose an early repayment charge that will incur if the borrower changes mortgages or remortgages their house. In this case, the borrower may have to repay the entire loan before its term in order to be able to take out another mortgage or remortgage their house. Such charges are put in place to ensure the lender that the borrower who has taken out the fixed rate mortgage will be able to repay the loan until the mortgage’s end date.

With the number of mortgages on the rise following a period od economic downturn, it appears that loans with a fixed rate interest are becoming increasingly popular. For the borrower this means that despite the initial expensive repayment charges, they are guaranteed to repay the same amount every month, which means that the lender is also guaranteed to receive the same amount of money each month.

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Joel Desvignes

 


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