Features of fixed term mortgage
- A fixed rate that remains throughout the tenure of the mortgage is charged
- The rates are not tied to an index and are not dependent on the market
- A fixed monthly payment has to be made in a simple and uncomplicated manner with no complications or perils of complex parameters.
- Generally suitable for longer term loans
- Beneficial in most cases, except when the variable rate falls below the fixed rate for an extended period of time.
- Prove to be more expensive than variable term mortgages.
- Prepayment is an option offered in some countries for fixed term mortgages, but with a prepayment penalty
- Involves a tradeoff between reward and the risk involved. When interest rates are rising open term mortgages are more risky.
- Fixed term mortgages are termed ‘plain vanilla’ as a financial product, since they are simple, basic and uncomplicated.
- They are not recommended in scenarios of declining interest rates, at which time variable term mortgages are preferable since the borrower will benefit from every fall in the market interest rate.
- Though expensive, it is a preferred refinancing option by people preferring the safe predictable repayment route who allocate a fixed amount for repayment for the fixed time period.
- Fixed term mortgages are beneficial to loan takers, unlike variable term ones benefiting the banks or mortgage providers.
In New Zealand, for the first time in years, 2011 has seen the percentage of floating or variable term mortgages overtake fixed term mortgages, as revealed in the latest central bank reports.