What is a Fixed-Rate Mortgage?
A fixed-rate mortgage sets an interest rate for a set period of time. This means that, unlike variable or tracker mortgages, even if the Bank of England interest rate goes up or down the amount you pay every month will stay the same until your fixed rate ends.
Mortgage lenders can offer a special fixed rate for a set period of time but once that period has ended the interest rate will revert to the lender’s own standard variable rate which can be substantially more than the national interest rate.
If you want to avoid reverting to the lender’s standard variable rate at the end of your fixed-rate mortgage you will need to remortgage or take advantage of the existing lender’s product retention rates.
Many people choose a fixed-rate mortgage because it makes budgeting much easier. With a fixed-rate mortgage you know exactly how much your mortgage will cost each month for the entire length of the rate.
Recent research carried out by the Bank of England has shown that in the last few years long term fixed-rate mortgages (those with fixed-rates for five years or more) have become increasingly popular. Over half of all mortgages arranged in 2019 Q4 were fixed for five years or more. Analysts at the Bank of England suggest this could be due to the current low interest rates.
How Long Can I Fix My Mortgage Rate For?
There are a number of periods lenders offer for fixed-rate mortgages. The most popular durations for a fixed-rate mortgage is for either two years or five years. This means that when choosing a product you will have far more options for two or five year fixed-rate mortgages so it is worth shopping around.
However, you can also find deals for one, three, seven, 10 or even 15 year fixed-rate mortgages. The longest rate offered by any UK lender currently is 15 years but this changes so it is a good idea to explore all the options with a mortgage adviser.
In most cases the longer the term offered by a lender the higher the interest rate. For example, a lender might offer a two year fixed-rate mortgage at 2.53% but increase the rate to 2.83% for a five year deal or 3.05% for seven years.
This is because the lenders do not know if interest rates will go up or down and the longer the term of the deal the harder it is to predict what will happen to interest rates. To protect their investment lenders generally offer higher interest rates for longer fixed-rate deals.
For the customer it means that you pay more for peace of mind. A longer fixed term brings the security of knowing how much your monthly mortgage repayments will be for a longer period of time.
What is the Right Length of a Fixed-Term Mortgage?
As with any financial product there are always advantages and disadvantages for you to weigh up before you commit.
The advantages of a fixed-rate mortgage include:
- Security – you know how much your monthly repayments will be for a set period of time.
- If interest rates goes up your mortgage payments will not go up.
The disadvantages of a fixed-rate mortgage include:
- If interest rates go down your payments will not go down.
- Fixed-rate mortgages usually have a slightly higher interest rate than variable rate mortgages.
Also bear in mind that for any type of mortgage there can be fees to pay to set up the mortgage and there may be financial penalties if you want to repay your mortgage early.
How do Early Repayment Charges Work?
Early repayment charges (ERC) can be incurred if you want to repay all or part of your mortgage before your agreed fixed-rate period has come to an end.
Some lenders extend the ERC period beyond the duration of your fixed term so be sure to read the small print on your mortgage deal.
These charges are usually charged as a percentage of the outstanding balance of your mortgage. They generally reduce with each year of the term, so for example for a five year fixed-rate mortgage the early repayment charge in year one might be 5%, reducing to 4% in year two, and so on down to 1% in year five.
Can I Avoid Paying an Early Repayment Charge?
You can’t avoid paying an early repayment charge if it is written into your fixed-rate deal (and these days most lenders do include some form of early repayment charge). However you can avoid paying an ERC if you wait until your fixed-rate mortgage term ends before you remortgage.
As mortgage advisers we will look at all the available deals and if one is available that is significantly better than your current deal we will do the maths to see if it is worth paying the ERC in order to secure a better interest rate. In some cases the money you will save over a number of years from a lower interest rate will exceed the amount you’d need to pay to exit the deal early.
Early repayment charges can also apply if you move house before your fixed-rate deal is up. This can be avoided by porting your mortgage. This basically means that you take your current mortgage deal with you when you move house instead of remortgaging.
Can I Overpay on a Fixed-Rate Mortgage?
Yes, most deals allow homeowners to overpay up to 10% of their outstanding mortgage balance each year of the fixed-rate deal.
Always check the small print to be clear of the exact amount linked to your deal as if you overpay more than the agreed amount then early repayment charges could be incurred.
Key Things to Consider When Selecting a Fixed-Rate Mortgage
Before committing to a fixed-rate mortgage you need to consider:
- What monthly payments you can afford
- How long you want to fix the term for
- What you’ll do after the fixed-rate ends
- How much you can afford to spend on set-up fees
- If there are any early repayment charges
- If you might want to overpay