What is a Fixed-Rate Mortgage?
With a fixed-rate mortgage your interest rate, and therefore your monthly repayments, will stay the same for the duration of the period you’ve chosen to fix. Most fixed rate mortgages are for either two or five years, although terms in between and for longer are also usually available.
A fixed rate mortgage provides certainty over your mortgage interest rate for a set period of time, giving you peace of mind that your monthly payments won’t rise for as long as you’re within the fixed term. As you know what your mortgage payment will be, it’s usually easier to budget and plan your finances if you have a fixed rate mortgage.
How does a fixed-rate mortgage work?
With a fixed-rate mortgage, the interest rate charged on your home loan remains the same for a specific period. So choose a two-year fixed rate and you know that your interest rate – and therefore your monthly repayments – won’t change for the next two years.
Once the fixed rate period comes to an end, you can expect to be moved onto your lender’s standard variable rate, which is usually higher than the fixed rate. For this reason, many people remortgage to a new mortgage deal to coincide with their fixed rate term ending.
What fixed-rate mortgage terms can you get?
Most fixed rate mortgages tend to be for terms of two years or five years, although one, three, seven and 10 year options can also often be found. Longer fixes for 15 years and 40 years, have also recently been available, but these aren't as common.
How long should I fix my mortgage for?
This will usually depend on your circumstances, preferences and what you think might happen to interest rates going forward.
If you’re someone who wants certainty over your mortgage payments for the long term and would rather not have the expense and effort of remortgaging again in a couple of years, a five year fixed rate mortgage, or even something longer, might be worth considering. If you believe mortgage rates might increase in the near future, locking into the rates available now for a longer amount of time may also work to your advantage.
Of course, the flipside is that interest rates might fall, and if you’re locked into a fixed rate mortgage for a long period of time, you’re likely to miss out on these lower rates (unless paying the early repayment charge to exit your current mortgage and switch to a lower rate deal makes sense financially). Fixing for a shorter term might also be a more suitable option if you intend to move house in the near future.
Ultimately, knowing how long to fix for isn’t always easy. For this reason, we’d always suggest approaching a mortgage adviser if you’re in any way unsure.
What interest rate might I pay on a fixed rate mortgage?
A number of different factors determine the interest rate you’ll be charged on a fixed-rate mortgage. These include:
Length of the fixed rate period
Borrowers pay a premium for the certainty offered by fixed-rate deals, and that premium tends to increase in line with the length of the fixed rate period. So a five-year fixed-rate mortgage typically comes with a higher interest rate than a two-year fixed mortgage, for example.
How much you want to borrow relative to the overall value of the property is referred to as your loan-to-value, or LTV. So if you have a £10,000 deposit to put towards a £100,000 home and need to take a £90,000 mortgage to cover the rest, you’re borrowing at 90% LTV.
The higher the proportion of a property that you need to pay for with a mortgage, the higher your LTV and, in turn, the greater the risk a lender believes they are taking on. For this reason, you can generally expect to pay a higher interest rate on a 90% LTV mortgage compared to a mortgage at 60% LTV or less, where a deposit of at least 40% has been put down.
» MORE: The importance of loan-to-value
Many mortgages come with an arrangement fee that borrowers must pay in order to reserve the product they have chosen. However, wide differences can often be seen in the size of these fees, and sometimes there'll be no fee to pay at all.
Mortgage products with the lowest interest rates tend to come with arrangement fees, sometimes of up to £2,000. Conversely, a mortgage with no arrangement fee will generally carry a higher interest rate. If you have the choice, it’s important to compare the total cost of mortgages including fees, rather than just focusing on the interest rate, to see which fee/rate combination works out cheaper overall.
Be aware that it’s often also possible to add arrangement fees onto your mortgage, but that this will increase your payments and the amount of interest you pay overall.
Your credit standing
You will need to be able to pass a credit check to be able to get a mortgage. Lenders will usually only offer mortgages to borrowers who they believe will repay the deal on time. So if you have black marks on your credit score, perhaps as a result of late repayments on a credit card or phone bill, then you may not be accepted for a mortgage at all, or you might sometimes be offered a higher interest rate as a way for the lender to balance the extra risk they feel they are taking on.
» COMPARE: Fixed-rate mortgages
What happens when my fixed rate mortgage ends?
When you come to the end of a fixed-rate period, the interest rate charged on your mortgage switches automatically to your lender’s standard variable rate or SVR. This rate will often be higher than the fixed rate you’ve just left behind and your lender might also retain the option to alter it at any time.
As a result, it’s common for borrowers to remortgage to a new home loan when they are approaching the end of their fixed rate period, in order to avoid the possible payment shock of transferring onto the SVR, and to bring certainty back to their mortgage payments if they choose a new fixed rate deal. It’s usually possible to arrange a new mortgage once you enter the last six months of your existing fixed rate mortgage.
» COMPARE: Remortgage deals
Can I come out of a fixed-rate mortgage early?
It is possible to remortgage to another deal during the fixed term of your mortgage, though there will be a financial penalty for doing so. This early repayment charge (ERC) or redemption penalty is usually calculated as a percentage of the sum being repaid.
The ERC may be a flat rate for the duration of the term or it might decrease as the remaining mortgage term reduces. However, even with an ERC as low as 1%, if you want to repay an outstanding mortgage balance of £200,000 early, this will result in a charge of £2,000.
Given an ERC could easily be as high as 5%, they should be an important consideration when it comes to selecting the right fixed-rate mortgage. You don’t want to tie yourself into a lengthy fixed rate, with significant ERCs, if you are likely to need to move to a new deal – or move house – during the term of that fixed period.
Is a fixed or variable mortgage better?
Ultimately, this will come down to your own circumstances and attitude to risk.
A variable rate mortgage may have a lower interest rate at the outset and if interest rates fall then your repayments will, too. However if interest rates rise your repayments will go up, meaning it may end up costing you more.
If you are happy to accept this risk then a variable mortgage may suit you. However, if you prefer the certainty of knowing exactly what your repayments will be for the next couple of years then a fixed-rate mortgage is likely to be more appropriate. Always seek mortgage advice if you are unclear on what is right for you.
Fixed-rate mortgage pros and cons
Whether you should take a fixed rate mortgage or not is an important decision in itself. And if fixing is right for you, there’s more to weigh up, including which fixed rate term, and interest rate and fee trade off is best for you.
Advantages of fixed-rate mortgages
- Absolute certainty over your monthly payments for the duration of the fixed term.
- There’ll be no unexpected rises in your payments, even if interest rates generally increase.
- It’s easier to budget as you know what your mortgage payments will be.
Potential drawbacks of fixed-rate mortgages
- A general fall in interest rates won’t result in lower monthly payments for you.
- There are usually early repayment charges for exiting a fixed rate deal early.
- Remortgaging to avoid the SVR requires effort and likely payment of fees for the new mortgage deal.
- Fixed rates are often higher than variable rates.
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John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more