When getting a mortgage, you’re usually presented with two options regarding the interest: fixed rate and variable. Most borrowers opt for a fixed-rate mortgage (more on why in a bit), though variable options are available. If you’re wondering about fixed rates and everything they entail, you’ve come to the right place. This guide is all about fixed-rate mortgages and what you should know before making a mortgage decision.
What is a fixed rate mortgage?
A fixed-rate mortgage is pretty much as it sounds. You lock in the interest rate of the loan for a specific period of time, usually two or five years. Your rate won’t change during that time, even if the Bank of England base rate (BOE) increases or decreases.
That means your monthly mortgage payments stay the same for the agreed amount of time. So you won’t see a difference in your payments and can budget more accordingly when it comes to your monthly outgoings.
After the fixed term comes to an end, your mortgage will return to the lender’s standard variable rate (SVR), which will most likely be higher than the fixed-rate deal. However, at this point, you’re free to switch to another deal or even renegotiate with the original lender.
What is a variable rate mortgage?
Unlike fixed-rate mortgages, a variable tracks the BOE and changes accordingly. If the BOE goes up, so does your monthly mortgage payment. And if it goes down, guess what? You will see a reduction in your monthly payments.
Most people opt for a fixed-rate mortgage as it offers them more security in the medium to long term. Therefore, they can better plan their finances, especially as the BOE base rate is at a record low of 0.10 per cent and only likely to increase at some stage.
Why do most people get a fixed rate?
Again, the primary reason to go for a fixed-rate mortgage is security. Buying a house is likely to be the most expensive purchase you ever make and therefore having that extra security with a fixed-term deal can provide peace of mind.
If you know what your repayments will be each month over, say, a five-year period, you’re aware of what needs paying. It allows you to feel more financially secure and may even offer you more freedom in regards to your other finances. Saying that, not everyone prefers a fixed-rate mortgage, and it essentially comes down to the circumstances that work best for you.
How many years should I fix my rate for?
If you’ve made it this far, then you’re probably intrigued about fixed-rate mortgages. So the big question now centres around how long you should tie your rate in for.
2-year fixed-rate mortgage
A two-year fixed-rate mortgage locks you in for 24 months. In that time, you will pay the exact same amount each month until your mortgage switches to the SVR at the end of the term. Two-year fixed rates usually have the lowest interest rate, meaning the monthly repayments are the most affordable. However, they’re only usually available to people with excellent credit scores.
5-year fixed-rate mortgage
Five-year fixed rate mortgages tie you in for longer, providing security for half a decade. However, the interest rates are usually slightly higher than two-year fixed deals. If you want long-term security, then a five-year fixed might be the right option for you.
10-year fixed-rate mortgage
And if you really want long term security, then a 10-year fixed-rate mortgage could suit you. Again, expect higher payments with a 10-year fixed as well as added security. Fixed rated lasting 10 years aren’t as common as two and five-year fixed, but they are becoming increasingly popular.
Are there any other options?
Lately, a growing number of full-term fixed rate mortgages have begun hitting the market. Unlike other fixed rated, these full-term options last the entire duration of your mortgage. That means it will never revert to the SVR, and you pay the same amount every month until your mortgage is paid off.
Does refinancing hurt your credit?
Once your fixed rate ends, you will need to refinance your mortgage, unless you’re happy staying on the SVR (no one is happy on the SVR). Your options include getting a new deal with your current lender or finding another lender.
Because at least two years will have passed, you will need to go through the application process again. This includes a credit check, as the lender will want to see if you’re a good match for the new fixed-rate term.
Applying for a new fixed rate mortgage after your current one expires won’t hurt your credit. However, you should only apply for one mortgage and try not to borrow any other credit at the time, as multiple applications can impact your credit score.
Can I get out of a fixed-rate mortgage?
The short answer is “yes”. The long answer is “it’s complicated”. Most people tie themselves into a fixed-rate mortgage because they want to make the same payments each month. However, there may be times where your property’s value has gone up and you want to borrow more against the home.
In that scenario, you may wish to get out of your fixed-rate early in order to borrow more against the property. Or it may be that you’ve seen a much better rate somewhere else and want a piece of the action.
Before making any decision about leaving your fixed rate to borrow more, you should speak to your current lender. They may be happy to increase borrowing. If that option isn’t on the table, or you want to get a better rate somewhere else, you can indeed end your fixed rate early, but there are penalties attached. And that leads us onto the next question…
Can you pay off a fixed-rate mortgage early?
The majority of lenders have an early repayment charge bottled onto their fixed-rate mortgage product. Depending on the lender and how far you are into the term, you will need to pay a percentage of the mortgage to leave early.
A two-year fixed-rate usually has a two per cent payment if you leave in the first year and a one per cent payment if you leave in the second year. Likewise, a five-year fixed rate usually works on the same basis, with the borrower paying five per cent of the amount owed off if they leave in the first year, going down to one per cent in the last year.
So before you decide to leave early, you need to ask yourself if it’s really worth potentially paying thousands of pounds just to leave the mortgage.
Summary: Get to fixin’
A fixed-rate mortgage can be a great decision if you want to lock yourself into the interest rate and pay the same amount each month for a set number of years.
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