Want to know how fixed-rate mortgages work, their pros and cons, and whether a fixed-rate deal could be the right type of mortgage for you? Here’s our easy guide with everything you need to know about fixed-rate mortgages.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a mortgage where your interest rate is guaranteed to stay the same for a set period of time. This type of mortgage can offer peace of mind; because unlike a variable-rate mortgage (such as a discount or tracker), you’ll know exactly how much you need to repay each month during this period. There tend to be far more fixed-rate mortgages available in the market than any other type of deal.
How long is the interest rate fixed for?
Currently you can fix your mortgage rate for one, two, three, five, seven, 10 or 15 years; though one-year and 15-year fixes are rare to come across. Generally speaking, the longer your fixed-rate period lasts, the higher the interest rate will be. This is because it is harder for a lender to predict what will happen in the market over a longer period of time. Therefore, you’re essentially paying for the security of knowing that your rate won’t go up no matter what happens in the future.
Should you get a two-year or five-year fixed-rate mortgage?
We get asked this question a lot as the vast majority of fixed-rate mortgages are either two-year or five-year deals.
Two-year fixes provide the greatest freedom. We tend to advice that these are best suited to borrowers who want to actively manage their mortgage and regularly switch deals; or those who are considering moving home in the near future.
Five-year deals protect your mortgage rate for longer, but are slightly more expensive. The prospect of locking in a low rate for five years can be attractive; but you’ll need to think about whether you really want to commit to a deal for that long.
It’s important to remember that if you need to pay off your mortgage while you’re in a fixed period (for example if you want to move house or remortgage); this can be very expensive as you’ll generally need to pay an early repayment charge (ERC). This is why we recommend speaking with a mortgage broker as we will be able to give you advice if you’re unsure how long to fix for.
Are there any fees or charges on fixed-rate mortgages?
Choosing a fixed-rate mortgage isn’t all about the term and interest rate. When comparing deals, it’s so important to look closely at their up-front fees, ERCs; and whether you can make overpayments without facing a penalty.
Up-front fees
Fixed-rate mortgages usually come with an up-front fee. Depending on your lender, this might be called a product fee, arrangement fee or completion fee. Research by Moneyfacts in November 2020 showed the average up-front fee on a fixed-rate deal had risen to £1,078, the highest level recorded since November 2012.
Early repayment charges (ERCs)
ERCs on fixed-rate mortgages are charged as a percentage of the outstanding balance. ERCs on five-year fixes often start at around 5% of the balance in the first year, before reducing by 1% each year thereafter. As mentioned, our advice is that if you’re likely to be moving house within the next five years; you might want to consider a shorter-term fixed-rate deal or a five-year product with no (or low) ERCs. Your future plans should be discussed with your mortgage broker in order for them to find your best mortgage match to suit your plans and current circumstances.
Overpayments
Most fixed-rate mortgages allow you to overpay up to 10% of the balance each year; either in regular overpayments or on an ad-hoc basis. Be wary as if you overpay more than this amount in a 12-month period, you may need to pay an ERC.
Variable vs fixed-rate mortgages
Fixed-rate mortgages differ from variable-rate mortgages; where your monthly repayments can go up or down because of changes to the Bank of England base rate. Historically, fixed-rate mortgages were more expensive than variable-rate deals such as discount or tracker mortgages; but this isn’t necessarily the case anymore. There are a couple of reasons for this. Firstly, fixed-rate deals have become so popular and competitively priced that borrowers with big deposits can get very low rates. Secondly, the COVID-19 outbreak, and the cuts to the base rate that followed, meant many of the best variable-rate deals were withdrawn from the market. This made discount and tracker deals less common and less attractively priced.
What happens when the fixed period ends?
When your fixed-rate period comes to an end, your lender will transfer you onto a standard-variable-rate (SVR) mortgage. Every lender sets its own SVR and this can change by any amount at any time. In November 2020, the average interest rate on a two-year fixed-rate mortgage was 2.53%, while the average SVR was 4.44%. Meaning that in that time period repayments on an SVR mortgage were significantly more expensive. For this reason it’s important to remortgage to a new deal.
Here at The Residential Mortgage Hub we like to inform you when your deal is coming to an end before you get transferred onto the SVR. You can arrange this up to six months before your fixed period is due to end.
Get in touch
So, if you’re looking into the possibility of getting a fixed-rate mortgage why not speak to the experts? Our team of experts take the time to make sure that we find the best solution that is right for you, your plans and current circumstances.
To speak to a specialist adviser about fixed-rate mortgages, please get in touch today.
