Guide to fixed-rate mortgages
- With a fixed-rate mortgage, your monthly payments will stay the same through the life of the deal
- You may find that fixed-rate mortgages have higher rates and fees than variable products
- To help you decide whether a fixed rate’s right for you, you could talk to a mortgage adviser for further guidance
If you want certainty that your mortgage payments will be the same each month, a fixed-rate mortgage might be a good choice for you.
Fixed-rate mortgages are extremely popular - in the fourth quarter of 2015, 86% of new residential mortgage business with UK banks was fixed rate, according to Bank of England figures.
It’s easy to see why. Your mortgage is likely to be your biggest monthly payment, so enjoying the certainty that it’ll stay the same each month is very important for many households.
How does a fixed-rate mortgage work?
When you take out a fixed-rate mortgage, the lender agrees to keep the interest rate the same for a set period of time.
This means that your monthly payments won’t change during that time, even if the Bank of England base rate or your lender’s standard variable rate (SVR) changes.
This means you’re protected from interest rate rises - if you had a variable rate mortgage such as a tracker product, your monthly payments would increase in line with rates going up.
However, it also means you won’t benefit from any falls in interest rates - your monthly payments will stay exactly the same for the length of the deal.
Length of fixed rates
Fixed-rate mortgages most commonly last for two or five years.
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However, there are other lengths of fixed-rate mortgages, including some much longer-term options such as 10-year fixed rates.
In general, the longer the length of the fixed rate, the higher interest rates and fees will be.
However, because the life of the product is longer, it’ll be longer before you have to remortgage, so a long-term fixed rate may work out better value over time.
It can be complicated working out whether a fixed rate works out better value for you, so it’s a good idea to speak to a mortgage adviser who can help crunch the numbers.
Advantages of a fixed-rate mortgage
The main advantage of a fixed-rate mortgage is certainty - you’ll know exactly how much you’ll pay for your mortgage each month for several years, which makes budgeting much easier. This can be particularly reassuring for first-time buyers, or anyone who feels they’d struggle to pay an increased amount if rates do rise.
You may be able to find a fee-free mortgage with a fixed rate, but remember to check whether this actually works out good value or not.
Although there are usually early repayment charges on fixed-rate mortgages, many will allow you to overpay a certain amount each year without penalty - 10% is common.
Disadvantages of a fixed-rate mortgage
The main disadvantage of a fixed-rate mortgage is that you won’t benefit if interest rates fall.
Although rates can’t fall much further when the Bank of England base rate is at 0.5%, many homeowners found themselves paying over the odds on fixed rates when the base rate tumbled from 4.5% to 0.5% between October 2008 and March 2009.
At the same time, some lucky mortgagors on tracker rates that were tracking below the Bank of England base rate actually ended up paying no interest on their mortgages.
Another disadvantage is that fixed-rate products traditionally have higher interest rates and fees than their variable counterparts.
However, sometimes the gap is surprisingly narrow. Bank of England figures showed that, in the final quarter of 2015, the average rate for new fixed-rate mortgages was 2.62% - just 0.25% higher than the variable rate average of 2.37%.
Yet throughout 2009 the fixed-rate average was around 2% higher than the variable rate average, so the temptation to plump for a variable product and risk a rate rise would have been much greater at that time.
What happens when my fixed rate ends?
When your fixed-rate deal comes to an end, you’ll be moved onto your lender’s standard variable rate automatically.
This may well be higher than the fixed rate you were on, in which case your monthly payments will increase.
Because of this, it’s a good idea to think about remortgaging a few months before your fixed rate ends.
Most mortgage deals can be booked up to six months in advance, so start comparing rates and fees for both fixed-rate and variable mortgages early.