What is a fixed-rate mortgage?

You’ve likely come across the term ‘fixed-rate mortgage’ – but what does it actually mean, and is it the right choice for you?

Here’s a brief guide to understanding fixed-rate mortgages: what they are, how long you might want to fix your rate, and some alternatives to consider.

What is a fixed-rate mortgage deal?

A fixed-rate mortgage sets the interest rate on your mortgage payments for a specified period. This ensures your monthly payments remain consistent throughout the agreed fixed-term.

What happens when the fixed term ends?

The fixed term applies only to the initial part of your mortgage deal, not the entire loan duration. For instance, while your mortgage might be repayable over 25 years, the fixed term could last just five years.

Once the fixed term ends, you’ll transition to a standard variable rate set by your lender. This rate is not fixed and can fluctuate. Consequently, many people opt to remortgage at the end of their fixed term to avoid potentially higher standard interest rates.

How long should I fix my mortgage for?

You can fix your mortgage for a period ranging from one to ten years, with the most popular options being two-year or five-year fixed terms. While a longer fixed-rate deal might initially seem like an obvious choice, there are reasons to consider a shorter term.

For instance, if you plan to move home or remortgage within the next five years, you might have to pay substantial charges to exit your current fixed-term mortgage. These costs could offset any savings from the fixed-rate deal.

Additionally, longer terms come with higher interest rates. Mortgage lenders need to protect their investments, and since they can’t predict the market in ten years, they take on more risk by offering longer fixed terms. To compensate for this risk, the interest rate on longer terms is higher.

It is advisable to speak with a mortgage adviser about your current and future home plans. They can provide impartial advice on the best fixed-rate term length for your situation.

Are there any negatives to fixed-rate mortgages?

Fixed-rate deals are popular among homeowners due to the convenience and stability they offer. However, there are some downsides to consider before committing to one.

If you need to change your mortgage or repay it early while still within the fixed period, you will incur substantial charges. These charges are usually calculated as a proportion of the amount borrowed and owed, making them particularly high at the beginning of your mortgage term.

Additionally, fixing your rate means you cannot benefit from favourable market fluctuations. If interest rates decrease, you could end up paying more than you would with a different type of mortgage deal.

What other options are there besides fixed-rate mortgages?

If you’re concerned about incurring early repayment penalties or anticipate moving within the next year or two, there are other mortgage options worth exploring.

For instance, variable mortgages fluctuate based on the market interest rate. While this means your monthly payments might vary, you could potentially save thousands of pounds in interest compared to a fixed-term deal if the market rate decreases.

How to find the right mortgage deal

Fixed-term mortgage deals are popular with homeowners, but is it the right choice for your situation?

While you could handle the mortgage application process independently, this approach might not lead you to the most suitable deal. By going directly to mortgage lenders, you could miss out on options that a mortgage adviser can secure for you.

Eliminate the guesswork from your mortgage hunt: book an appointment with our team of mortgage advisers to explore the range of mortgage options tailored to your needs.