What is a Fixed Term Mortgage

Fixed term mortgage is a type of mortgage that has a fixed duration of time. A Mortgage is a loan taken for the purchase of real estate, and is secured by the property being purchased with the amount. That is, the property being bought with the loan serves as collateral for the loan. Mortgages are of different types with open or fixed terms, fixed or variable interest rates. Most fixed term mortgages permit the payment of a fixed interest rate during the term chosen by the customer, which could be ten, fifteen years or more. Also in most instances fixed term mortgages are provided at a rate of interest lower than open term mortgages. In case the mortgage is being paid before the stipulated time, an interest penalty is charged.

A fixed term mortgage is just another name for a fixed rate loan since both have identical features and are actually quite flexible in terms of repayment. Both are the reverse of open term loans or variable rate mortgages in which interest rates fluctuate as per the market.

While the interest rates of fixed term mortgages remain the same throughout the stipulated tenure, the interest rate varies from company to company, or bank to bank. Hence, people opting for fixed term mortgages shop around to get the lowest possible interest rate. Despite their name, they are not rigid, and offer flexibility of down payments and other payment options.

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 trade off 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.

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