A fixed rate mortgage is a type of mortgage where your interest rate stays the same for a fixed period. Simple as that. Take out a loan to buy a property, and the interest on the loan remains unchanged for a set time, usually two or more years.
This is the most common and popular type of mortgage in the UK — 74% of residential mortgage holders have one, according to the FCA. A fixed rate makes budgeting easier, because you’ll know what your interest is over the next two, five, ten years — or even the whole mortgage. You’re prepared for what comes out of your pocket, which means no nasty surprises.
In this quick guide, we’re looking at how fixed term mortgages work, what your alternatives are, and what to do when your fixed rate mortgage ends.
More info: what is a fixed rate mortgage loan?
A fixed rate mortgage loan fixes your rate of interest over a given period.
When a bank or other type of lender issues a loan, they want to get back extra in return. That’s ‘interest’, and it’s totally normal. Over time, though, interest rates can go up and down, for all sorts of economic reasons that are out of our control as home-buyers.
So you might get your loan when the interest rate is low, but find that five years down the line, those rates climb much higher. And that means more for you to repay if you’re on a variable rate (more about variable rates later).
That’s where a fixed rate mortgage is useful.
With a five-year fixed rate mortgage, for example, interest is fixed for five years. So, you can be sure that you won’t be stung by climbing interest rates. The flip-side of that is if interest rates drop in the future, it will be harder to switch to a lower rate because you’ll be locked into that five year fixed deal. And you might not be able to leave that deal without paying your lender an early repayment charge – an exit fee for leaving your deal early.
Should you choose a two-year or five-year fixed rate mortgage?
Two-year and five-year fixed rate mortgage deals are the most common. But they actually come in all shapes and sizes: one-year, three-year, seven- or ten-year. With our own mortgage, Habito One, you can even fix your deal for the whole term of your mortgage – up to 40 years.
How long you choose to fix for will depend on whether you lean towards flexibility or stability. If you want to sell up and move reasonably soon, a two-year fixed rate mortgage might make sense. But if you reckon you’ll be in your new pad for the longer term, a longer fix might be better. That’s because you’ll almost always need to pay exit fees to leave any deal. Long term fixed rate without exit fees do exist, but they’re few and far between.
Remember: the longer the term, the higher the interest. Greater security comes at a price. If you want that ten-year fixed rate mortgage, you’ll pay a higher rate of interest than on a two. Then again, the longer you fix for, the less often you’ll have to remortgage (switch your fixed deal) over the life of your mortgage. So with longer fixes, you’ll likely save on remortgage fees – which are typically £999 each time, though they vary from lender to lender. A broker like Habito can help you consider all these things and work out which is the right approach for you.
Fees and charges to watch out for
There can be other costs above and beyond your mortgage repayments. Here are the key ones to look out for.
- Upfront fees. Lenders call these all sorts of things (arrangement fee, completion fee, product fee). But they can reach a couple of thousand pounds, depending on the lender.
- Overpayment charges. Overpaying means paying extra towards your mortgage, usually to pay it off sooner. Usually, you can overpay about 10% of your balance a year without a fee. But if you choose to pay more than that, your lender might charge you a fee called an early repayment charge.
- Early repayment charges (ERCs). Lenders will charge these not only if you overpay more than 10%, but also if you want to leave your fixed deal early. For example, if you’re thinking of moving house when you’re still on your fixed rate. This charge is usually a percentage of the mortgage you have left to pay – more on ERCs here.
For example, if you’re on a five-year fixed rate mortgage, that might be around 5% of your outstanding balance in the first year. It’s usually reduced by a percentage in following years. Variable rate mortgages tend to have lower or no ERCs.
Note that these are just charges related to your mortgage – you’ll also need to set some money aside for your legal work, property survey and moving fees.
Variable rate mortgages, you say?
Fixed rate mortgages aren’t your only option when buying a home. Variable rate mortgages are another choice – these have interest rates that can fluctuate.
While that sounds scary, there are good reasons why borrowers sometimes want a variable rate mortgage. They offer you less stability, yes, but they can give you lower rates and lower fees. That means if you want full flexibility – and you’re intending to sell quickly – a variable rate mortgage might be a better deal.
There are two types of variable rates to know:
- Tracker mortgage. The tracker mortgage is pegged to the base rate – the interest rate set by the Bank of England. This can give you some of the lowest interest rates of all mortgages. But it’s quite unpredictable – and charges still apply.
- Standard variable rate (SVR). Every lender offers an SVR. It tends to be the base rate plus a percentage for the lender. That makes it most likely more expensive – and a little risky, too (because lenders can technically change it any time). However, it tends to come with lower fees and ERCs – meaning if you want out, it will cost you less.
Which is better? Variable or fixed rate mortgage?
We hate to say “it depends” but… it depends.
These days, with fixed rate mortgages being popular and competitively-priced, and with interest rates low, they usually come out on top.
But if you don’t know what the next couple of years will look like, a variable rate mortgage might offer you a bit more flexibility because you can avoid some of the exit fees.
What happens when my fixed rate mortgage ends?
Decision time! At the end of a fixed rate mortgage, it’s on you what happens next.
If you don’t do anything, your lender will move you over to their own (most likely more expensive) standard variable rate. This might be okay for some people, but it’s usually not where you want to be for the long-term.
Instead, you can take control of this process and choose from a few options:
- Remortgage with the same lender: This basically means switching from one mortgage deal to another – basically like switching your broadband contract – and it can save you some serious cash, too. Your lender will offer you mortgage deals to switch to, though it’s always worth checking deals from other lenders as well (more on that next).
- Remortgage with another lender: It’s always worth checking the whole market – deals from other lenders, not just your current one – before you switch. Your current lender might offer you a good deal, but that doesn’t mean there isn’t a better one out there from somewhere else! A broker like Habito can help you find the best deal, and handle the paperwork of applying for your new deal too.
- Sell up and move on: It’s best to avoid selling your property when you’re in the middle of a fixed rate mortgage term — although of course you can’t always control that. While you’re outside your fixed rate mortgage term, you’ll have the flexibility to move without extra fees.
At Habito, we’ll help you decide which mortgage option is best for your unique circumstances, and we can make the whole mortgaging process super smooth and easy. As a broker, we give you access to the whole of the mortgage market – 20,000 options from 90+ banks and lenders. So whatever kind of mortgage you’re looking for, get started with us today.