Fixed rate mortgages are one of the most common types of mortgages in the UK. The product offers stability for a specific period of time, allowing you to budget your monthly outgoings and easily plan for the future.
However, before you commit to a fixed rate mortgage, it is important you know how they work and what happens after the mortgage term comes to an end.
Key Points:
- Fixed rate mortgages means your mortgage repayments have fixed interest on them for a specific period of time.
- You will pay the same amount each month for the length of your introductory deal.
- Fixed rate mortgages usually last between 2 to 5 years, but some lenders offer mortgages up to 7 to 10 years.
What is a fixed rate mortgage?
A fixed rate mortgage is a type of mortgage where the interest stays the same for the duration of your deal.
They are one of the most common mortgage products for borrowers since they are a useful way to manage your money and know how much you’re paying each month.
How does a fixed rate mortgage work?
A fixed rate mortgage works by carrying the same interest rate throughout the entire length of the loan. This means you’ll know exactly how much is being paid towards your mortgage each month.
This differs to the likes of variable rate or tracker mortgages, where the interest rates can change regularly.
Knowing how much you need to pay each month means you won’t be faced with any nasty surprises and allows you to have control over your monthly spendings than other types of mortgages.
Lengths of fixed rate mortgages
You can usually have a fixed rate mortgage for 2 to 5 years at a time. However, some lenders do offer fixed rates between 7 to 10 years and sometimes even longer too.
A 2 years fixed rate mortgage means your monthly mortgage payments will remain the same for 2 years. After 2 years from the point the mortgage was taken out, your mortgage rate will move to the lender’s standard variable rate (SVR), unless you switch products with the same lender or remortgage with a new lender.
If you choose a 5 year fixed rate mortgage, you won’t be able to move to the lender’s SVR until 5 years after the mortgage has been taken out. This means you will keep your interest rate for a relatively long time, but you won’t be able to remortgage without paying an early repayment charge (ERC) for at least 5 years.
Is it better to have a 2 or 5 year fixed rate mortgage?
Whether you choose a 2 or 5 year fixed rate mortgage really depends on your individual circumstances.
2 year fixed rate mortgages are ideal for those who plan to move home in the near future and so don’t want to be locked into a mortgage for a longer fixed term. A 5 year fixed rate mortgage is more suited for those who have found a house they love and aren’t looking to move in the near future.
Being ‘locked-in’ for a relatively longer period of time can also work in your favour if you have low interest rates.
What happens when the fixed rate period of a mortgage ends?
As we’ve mentioned, after the fixed rate period ends, your mortgage interest rate will switch to your lender’s SVR. This could either cause the interest to rise or fall depending on the changes in the interest rate your lender charges.
If you don’t want to move onto a SVR after your fixed rate mortgage ends, you might be able to switch to a new product or move onto a new rate, depending on your lender.
Your lender should be in contact with you before your fixed rate ends so that you can make arrangements.
Advantages of fixed rate mortgages
The biggest advantage of fixed rate mortgages is that you’ll know exactly how much you will be paying each month for a fixed period of time. Your mortgage payments won’t change for the specific time period as per your mortgage deal, regardless of what happens in the economy or if the base rate rises or falls.
Committing to a longer term fixed rate deal also means you could save on the costs of remortgaging.
You are also protected if lenders change their criteria during your mortgage term. For example, if they tighten their affordability criteria, you will not be affected while you are locked into a fixed rate mortgage.
Disadvantages of fixed rate mortgages
One of the biggest disadvantages of a fixed rate mortgage is that if you choose a longer deal, your mortgage payments may initially be higher. This is because you will need to pay a small premium for the stability and security of a long term deal.
Another disadvantage is that if you want to exit the mortgage deal early, you will usually have to pay an ERC, which can be costly if there is a large mortgage balance outstanding.
Many lenders also put a cap on overpayments for fixed rate mortgages, often limiting excess payments to 10%, which can cause a hindrance when trying to pay the mortgage off faster.