Fixed Rate Mortgages for Expats

Going for a fixed rate expat mortgage

When taking out an expat mortgage, you will inevitably be faced with a series of decisions on the way you will want the interest rate on that mortgage to be applied. In the majority of cases, expats will tend to chose to take a fixed rate mortgage for the initial years of the loan. Although this sounds like a simple decision to make, it inevitably brings into focus a series of other decisions that may not be quite so straightforward.

The fixed rate period that is offered on any fixed rate expat mortgage will come with conditions that can affect the cost of the mortgage. Here are a few things to consider.

Fixed rate period – The fixed rate period on any expat mortgage you take out will only apply for an agreed period of the mortgage term and will usually be in the range of 2 years to 10 years. Some of the things that will affect your decision will be:

  • The UK economy – If you have come through a period of low interest rates but see the economy of the UK growing and expect interest rates to rise in the future then you may decide to fix your rate for a longer period to keep your payments on the mortgage steady. If the reverse were to be true with interest rates having been high but the economy slowing, then you may tend to opt for a short fixed period or may decide not to fix your rate and let it follow a standard indexation type arrangement.
  • Interest rates – generally the longer the period of the fixed rate, the higher the interest rate is likely to be as the lender will be taking the risk on any future movements in interest rates. This extra cost has to be balanced against how you see the UK economy moving during your chosen fixed rate period.
  • Cancellation fee – in most cases where a lender offers a fixed rate period on an expat mortgage, they will place a condition in the contract saying that if the mortgage is redeemed withing the fixed rate period, the lender will charge a fee to cover their costs. This can be expensive so you need to be sure that you will intend holding the mortgage for at least the fixed rate period.


What is a fixed rate expat mortgage?

Expat mortgages are usually taken out on long repayment terms, often for 25 years or more. During this period, interest rates will go up and down many times as determined by the progress of the UK economy and for most of that repayment period, the lender will apply their variable interest rate to the mortgage loan which means that the monthly repayments you make to your expat mortgage will be continually going up or down, making the management of your financial outgoings somewhat uncertain.

To help new borrowers by giving them some certainty of their monthly repayments, most lenders will offer their mortgages on an initial fixed interest rate, ensuring that the monthly repayment on the expat mortgage over the period of the fixed rate stays constant. This is where the term fixed rate expat mortgage comes from but it only applies to the agreed fixed rate period and not the overall term of the mortgage loan.

When the agreed fixed rate period ends, the mortgage interest rate will revert to the lenders standard variable rate for the remainder of the mortgage term and your monthly repayments will be subject to change.

When entering this form of arrangement you need to be sure that when the fixed rate period ends you will have sufficient flexibility in lending criteria that would allow you to change lender and avoid becoming trapped with your existing lender on their high interest rates.


When should I take out a fixed rate expat mortgage?

There are a number of situations where you could consider taking out a fixed rate expat mortgage but most of them are associated with providing some certainty on the level of your monthly mortgage repayments to your lender. Here are a few to think about:

Repayment security – Where a property is being purchased at a price that will cause the repayments on the mortgage to stretch your income, taking the mortgage out with a fixed interest period will mean that you will have certainty over what your monthly payments will be, during that period. This then allows you time to adjust to making your mortgage payments and have the possibility that depending on the length of the fixed period, you may see your income rise during that time making the payments easier to cope with.

When interest rates are low – The UK has now come through what is one of the longest periods in history where interest rates have been at rock bottom levels and all the experts, including the Governor of the Bank of England who sets interest rates, are indicating that interest rates are soon going to rise. Under a scenario like this and, considering fixing your mortgage interest rate is more likely to work in your favour as work against you, particularly when you learn that average UK interest rates have been around 6 to 7 percent while at the moment, they stand at around one half of one percent.

No one can tell you how quickly or how far interest rates will rise over any given period but under these existing conditions, fixing for a longer period would look to be the sensible choice, providing the interest rate premium you will have to pay is acceptable and you are certain that you will hold the mortgage for at least the fixed rate period, avoiding triggering early repayment charges.


How long will expat mortgage rates stay low for?

Low interest rate is a general term that will mean different things to different people and when talking in terms of mortgage interest rates, much will depend on what you have experienced in the past. Those of us who are older may remember interest rates in the UK being at around 15 percent in the early 1980s. After the credit crunch around 2008, interest rates dropped steadily between then and now to historically low levels of 0.25% and 0.5% today. They have now been at this very low level for a considerable time.

These low levels are part of the aftermath of the credit crunch and the actions taken by many governments around the world who raised funding to prop up their banking systems and maintain their economies. Much of the difficulties are now passed and most economies are seeing signs of improvement. In the UK, most of the damage has been repaired and indications from the governor of the bank of England is that we should be prepared for interest rates to rise. No one can forecast how quickly this will happen or by how much they will rise but the general thinking is that it will be gradual, perhaps by something like 0.5 percent in 2018 and a further one percent in 2019 but who really knows.

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