There’s a lot to consider when buying a home: How big is the garden? Carpet or hard flooring? What colour curtains? One of the biggest decisions you’ll need to make is choosing the right type of mortgage.
Fixed-rate mortgages are one of the most popular options for many homebuyers in the UK, offering stability as well as predictability in this ever-changing market.
Our team here at The Mortgage Pod have over 35 years combined experience in the property and mortgage industry, and we aim to draw on our own experiences and professional opinions to guide you through this decision. So stick around, and let’s jump into what a fixed-rate mortgage is, how it works, and why it may just be the right choice for you.
What is a Fixed Rate Mortgage?
A fixed-rate mortgage means that the interest rate is locked in for a specific period, which usually falls between 2 and 10 years, although fixed rate options for up to 40 years also exist!
This means your monthly repayments will stay the same throughout the fixed rate period, regardless of any changes in market conditions or interest rates.
For example, if you secure a 5-year fixed-rate mortgage, your interest and monthly payments won’t change during those five years, even if interest rates rise and fall.
How Does a Fixed Rate Mortgage Work?
With a fixed-rate mortgage, you agree to a set interest rate with your lender for a fixed term. This is often 2, 3, 5, 7, or 10 years, although fixed rates for the lifetime of the mortgage also exist.
The main benefit of this is that it offers you protection from those fluctuations in interest rates, creating a sense of stability in your monthly payments.
But remember, once your fixed rate mortgage period ends, if you don’t remortgage or complete a product transfer the mortgage typically reverts to the lender’s standard variable rate (SVR), which will likely be higher than your original rate.
Example: If you take out a 5-year fixed rate mortgage with an interest rate of 4%, you’ll continue to pay the 4% interest rate for the next five years, regardless of whether the Bank of England’s Base Rate or lenders rates change.
Pros of Fixed Rate Mortgages
- Predictability: Your monthly payments remain the same for the fixed rate term, making it easier to budget and plan your finances.
- Protection from rising rates: You are safe from any potential increases in mortgage rates during the fixed period you have agreed on.
- Peace of mind: Knowing that your payments won’t change provides you with some financial security, which is never a bad thing to have!
Cons of Fixed Rate Mortgages
- No benefit if interest rates fall: If the interest rates decrease during your fixed rate mortgage period, you won’t benefit from the lower rates unless you remortgage, which might involve paying early repayment charges.
- Higher rates after the fixed term: Once the fixed period ends, your mortgage will likely switch to the lender’s SVR, which tends to be higher than the rate you initially locked in with. This is why it’s best to opt for a new mortgage deal or remortgage BEFORE your fixed rate mortgage term expires, so make sure you keep the dates saved!
- Early Repayment Charges: Most fixed rates have a tie-in period and Early Repayment Charges (ERC) for the duration of the fixed-rate period. This can be very costly, as much as 5% of the outstanding balance if you need to end your mortgage early for any reason.
Why Choose a Fixed Rate Mortgage?
Fixed-rate mortgages are ideal if you prefer the security and peace of mind that comes from knowing exactly how much you’ll pay each month, especially if you expect interest rates to rise.
This type of mortgage is very useful for first-time buyers or those on a tight budget, as it can help you avoid unexpected payment changes, especially with the recent volatility in mortgage rates all round.
Current Data: As of October 2024, mortgage rates in the UK have fluctuated due to changes in the bank base rate, which currently stands at 5%. The average rate for a 5-year fixed rate mortgage is around 3.89% for those with a 60% loan-to-value (LTV) ratio.
Comparing Fixed Rate Mortgages vs. Variable Rate Mortgages
When deciding between a fixed-rate mortgage and a variable-rate mortgage, it’s important to weigh the pros and cons based on your own financial circumstances.
Fixed Rate Mortgages:
- Pros: Predictable fixed rate mortgage payments, protection from rising rates, easier to budget.
- Cons: No benefit from falling rates, higher rates after the fixed term, Early Repayment Charges during the tie in period.
Variable Rate Mortgages:
A variable rate mortgage will come with an interest rate that can change based on the market or the lender’s SVR. This means your monthly repayments can go up or down over time. If interest rates fall, you’ll be able to benefit from lower payments, but if interest rates rise, your payments will increase.
- Pros: Potential for lower payments if interest rates fall, often no ERCs. No risk, no reward, hey!
- Cons: Payments could increase if interest rates rise, making it harder to budget.
Example: A tracker mortgage is a type of variable rate mortgage that follows the bank’s base rate, plus a set percentage. If the base rate is 5% and your tracker rate is 1%, you’ll pay 6% interest. If the base rate changes, your payments change accordingly.
How to Compare Fixed Rate Mortgages?
Before pulling the trigger on a fixed rate mortgage, take some time to compare the deals available to you. Pay attention to crucial factors like interest rates, arrangement fees, and the length of the fixed period. Using online tools or consulting with mortgage experts can help you find a deal that matches your financial situation.
Key Factors to Consider:
- Interest Rate: Look for the lowest fixed interest rate available to keep your payments manageable.
- Fixed Period: Choose a period that aligns with your financial plans. A 2-year fixed rate might offer more flexibility, while a 5-year fixed rate provides longer-term stability.
- Early Repayment Charges: Be aware that you’ll probably face some charges if you plan to leave your fixed rate mortgage early or if you end up remortgage before the fixed term ends.
- Overall Cost: Consider not just the interest rate but also any arrangement fees and the total cost over the term of the mortgage to get a full picture.
What Happens When the Fixed Rate Period Ends?
Once the agreed period ends, your fixed rate mortgage will revert to the lender’s SVR, which is usually higher than your fixed rate. This is why many people choose to remortgage or switch to a new deal at the end of their fixed term to avoid paying higher rates. You may also want to read this guide: When is the best time to remortgage?
For instance, if you secured a 5-year fixed mortgage rate at 4% and the period ends, your lender’s SVR could be around 8.16%. At this point, you should look to compare deals and consider remortgaging, this way you can avoid paying a higher mortgage rate unnecessarily.
Conclusion: Is a Fixed Rate Mortgage Right for You?
Overall, choosing a fixed-rate mortgage is a great option for those who want predictability and protection from any rising interest rates. While you won’t benefit if interest rates fall, the stability it offers can be invaluable, especially in today’s uncertain economic climate.
Before making a decision, be sure to thoroughly compare mortgages, consult mortgage experts like our team here at The Mortgage Pod, and consider the overall cost of your mortgage deal. Don’t get distracted by the seemingly low figures.
Remember that plane ticket they promised you for £15? Bargain! Until you realise there’s no luggage allowance, you’re cramped for space, and the return flight is at 3 in the morning and somehow costs £739.
By understanding how fixed-rate mortgages work and comparing them to other options, you can make an informed decision that fits your budget and your individual needs.
