Make mortgage repayments simpler with five-year fixed-rate mortgages
Whether you’re on the first rung of the property ladder, or have an extensive property portfolio, a fixed-rate mortgage might just be the right way to help you buy a new house.
- A fixed-rate mortgage has fixed interest for a set period of time, often two or five years
- You may have to pay a variety of fees for setting up your mortgage
- Fixed-rate mortgages tend to be more expensive at inception than variable-rate mortgages. But there are benefits, including knowing what you're paying each month
If you’re struggling to navigate the labyrinth that is choosing the right mortgage, we’ve come up with a guide to one of the biggest types: the five-year fixed-rate mortgage.
Five-year fixed-rate mortgage
On a simple level, a mortgage is a loan used to buy property. Repayments occur monthly, and there are several ways of paying it back, which is how the varying types arise.
There are two basic types: fixed-rate mortgages and variable-rate mortgages. The difference between the two comes to how the lender manages the interest charged. Interest is the money the borrower pays in addition to repayments – effectively the cost of borrowing.
With a variable-rate mortgage, the interest rate will fluctuate according to a variety of economic factors.
By contrast, a fixed-rate mortgage fixes the amount of interest to an advertised rate. This means the repayment amount stays the same until an agreed-upon time period has elapsed. This arguably makes life simpler for the borrower, because they don’t have to worry about paying a different amount each month.
Fixed-rate mortgages in the UK usually operate for a set period rather than for the full life of the loan. Often this period is for five years, though borrowers can have them approved for anywhere between two and 10 years.
How do fixed-rate mortgages compare?
Generally speaking, fixed-rate mortgages tend to have higher starting interest rates than variable-rate mortgages as standard. But they're a common choice with borrowers because, among other things, there's a degree of certainty that comes with set monthly repayments.
Because interest rates can rise, it may be that a fixed-rate mortgage works out cheaper if interest rates rise higher than that attached to your mortgage. Although, of course, interest rates can also go down.
Fixed-rate mortgages and LTV
LTV stands for loan-to-value ratio. What this actually refers to is what percentage of the property's value you'll be loaned.
For example, if you go for an 80% LTV mortgage, you'll be loaned 80% of the total value of the property you wish to buy. The deposit you’ll have to pay will then be the remaining 20%. So, if the total value was £100,000, you would be loaned £80,000 after paying the initial deposit of £20,000.
Some 100% LTV mortgages are available, but are much less common than they used to be. You're more likely to find offers at a maximum of 95% LTV. More commonly for five-year fixed-rate mortgages, lenders will offer a 60-80% LTV.
Fixed-rate mortgages and fees
Before you take out your mortgage, you may well encounter a variety of fees to pay, which we'll explain here.
You may be tempted by a fee-free mortgage, but a lot of fees can’t be included in the ‘fee-free’ definition, so you'll still have to pay them.
Also known as the product fee or completion fee, this is a charge for the mortgage itself.
It can range from free to around £2,000. You can either pay it upfront, or it can be added to the mortgage amount itself. However, doing that will increase the amount owed, the interest payable, and the monthly repayment amounts.
Mortgage broker fee
This is exactly what it says on the tin: a fee charged by your broker should you use one.
If your broker doesn’t charge you a fee, it may instead take a commission from the provider you choose. This is quite an expensive fee, at an average of £500.
Telegraphic transfer fee
You may find it listed as a CHAPS (Clearing House Automated Payment System), and it is a payment for your mortgage provider to transfer the money to your solicitor.
It's often non-refundable, whether or not the deal falls through. Fortunately, it’s usually between £25 and £50, which hopefully won’t break the bank if it isn’t refunded.
Mortgage account fee
Administrative costs are everywhere, and mortgages require a lot of admin work. So, naturally, there’s a fee involved - usually between £100 and £300 - for the lender’s administrative costs in setting up and maintaining your mortgage.
When getting a mortgage, it’s likely that the lender will want to value your house to make sure it's worth the amount you’re looking to borrow. The valuation fee, which changes depending on the property’s value, is simply the charge levied for them to carry this out.
However, it might also be worth hiring a professional surveyor to fully examine the property for any faults: the mortgage lender’s survey will only look at the value, not the property’s faults and future problems.
A charge for applying for a mortgage deal, this fee may be included as part of the arrangement fee.
Some mortgage lenders will apply it only due to the size of the mortgage. At anywhere between around £99 and £250, it’s worth checking whether your provider will charge a booking fee.
Freedom of agency fee
This isn't something that's charged as much as it used to be, so it’s worth checking that there is one first.
This may be known as an ‘own buildings insurance fee’, and is applied if you decide to find your own buildings insurance over taking the policy offered by the provider.
Do your sums though, as getting buildings insurance through a separate provider may work out cheaper, even when you take the fee into account.
Don't feel pressured into accepting the lender's buildings insurance – it's always a good idea to shop around.
Exit or closure fee
If you are successful in repaying your mortgage in full, you may be charged an exit fee.
You may not, if you've already paid the mortgage account fee, as the mortgage account fee is paid for all the admin costs including account closure.
Top tips for cheaper fixed-rate mortgages
The smart way to get a cheap fixed-rate mortgage is to shop around. Don't feel obliged to settle for the first deal you see. Compare a range of fixed-rate mortgages, and hopefully you'll find the right one for you.