Fixed Rate Mortgage
Fixed rate mortgages are mortgages in which the mortgage holder pays a constant rate of interest, either for the entire duration of the mortgage or for a period of some years within it. Most mortgages are adjustable rate mortgages, meaning that the interest rate the mortgage-holder pays over time is not constant but changes in lines with prevailing interest rates in the economy. Usually, these would be set by a central bank.
While mortgage institutions are not strictly obliged to vary their interest rates in tandem with changes made by the central bank, they do so in fact most of the time. In periods of abrupt change, this can result in severe and unforeseen rises in the level of payments a mortgage holder must make. This can impose great strain on a family’s monthly budget. One way of avoiding the problem in whole or in part is through fixed rate mortgages.
With a fixed rate mortgage, the mortgage holder is insulated from changes in the prevailing interest rate in the economy as a whole. Some fixed rate mortgages are fixed in perpetuity; others are fixed only for a set number of years, such as a period of five years or seven years.