What are fixed-rate mortgages?
All mortgages (home loans) come with an interest rate – the cost of borrowing from a bank – which can be either fixed or variable. With fixed rate mortgages, it remains static and remains so for an agreed period. With variable rate mortgages, the rates could go up or down in the future.
How long do fixed-rate mortgages last?
They can last one, two, three, five, seven, ten or even 15 years. Not every lender offers each of those terms – but two and five-year deals are most common.
Homeowners wanting a fixed-rate must decide how long to fix for. Decisions will hinge on factors such as likelihood of moving house in the near future, attitude to risk and expected changes in finances or the economy.
What are the benefits of a fixed rate?
Homeowners know exactly how much they will pay each month for an extended period of time, making it easier to budget. Some fixed rate deals are priced very cheaply too (below 1.5% for those with larger deposits).
What are the drawbacks?
Borrowers won’t benefit from falling interest rates if they are locked into a deal. And the initial fees for taking out a fixed-rate mortgage need consideration. There are also stiff financial penalties for ditching a fixed-rate mortgage before the end of the agreed term.
Is it better to fix for two or five years?
Choosing how long to fix for depends entirely on your own circumstances. First-time buyers with ambitions to move house within a couple of years might prefer to fix for a shorter period. This means avoiding early repayment charges (ERCs).
However, someone with no plans to move might benefit from fixing for longer – avoiding having to review the mortgage too frequently and paying fees each time.
What price fixed-rate can I get?
This depends on how long you fix for. Usually, the longer the term, the higher the rate. It also depends on the size of your deposit – or how much equity you have in your current home if you are moving or remortgaging.
This is known as a Loan-to-Value, or ‘LTV’ for short. For example, first-time buyers with a £25,000 deposit for a £250,000 property will need a home loan worth 90% of the property price. Their LTV is, therefore, 90%.
But a homeowner looking for a new mortgage deal might have a property worth £500,000, and a mortgage balance of £300,000 left to pay, putting the LTV at 60%.
Borrowers with lower LTVs are seen as less risky and are awarded lower rates.
How do I get a fixed-rate mortgage?
They’re not hard to find. The vast majority of lenders offer them because they are so popular. Borrowers can either apply directly with a bank, building society or specialist lender – or use a mortgage broker.
Brokers can often access deals not available elsewhere and can help people whose finances are unconventional. Mortgage brokers may charge a fee for their advice, others take a commission from whichever lender they recommend to you.
There’s also no harm starting with your own search to discover what is available on the market.
Will I be approved?
A successful mortgage application will depend on your eligibility criteria – such as how much you earn, your partner’s income if it’s a joint mortgage, and how much other debt is outstanding from credit cards or loans.
Your credit rating is also key. This is based on your history as a borrower and your expected ability to repay a loan in future.
What fees will I pay?
An arrangement fee is commonly payable when you take out a mortgage.
Costs vary but £1,000 is normal for a competitive deal. If there’s no arrangement fee, the interest rate will likely be higher as a result.
Choice is determined by whether or not a customer can pay a high upfront cost for the benefit of a lower rate, and therefore a lower monthly mortgage payment.
It’s possible to add an arrangement fee to your mortgage debt rather than pay it upfront. However, this will increase your borrowing and the interest you pay.
A booking fee is a non-refundable one-off cost when you apply for a mortgage. Not all deals come with one, so costs range from zero to a couple of hundred pounds.
Valuation fees can also be payable, which allows lenders to check properties are worth the sum borrowed. But these can also often be waived as an incentive to customers.
A killer fee however is always the ‘early repayment charge’ (ERC) – triggered if a borrower quits their fixed-rate mortgage before the end of an agreed term.
Usually, it’s a percentage of the sum outstanding and can be substantial – adding up to thousands of pounds. Tiered arrangement fees, where the percentage reduces with every year of the deal, are commonplace. But anyone expecting to move house in future needs to think carefully about the length of their fixed-rate mortgage to avoid this fee.
Account or exit fees may also be charged – in relation to the administrative tasks of creating or closing a mortgage.
What flexibility do fixed rate mortgages offer?
Though the name suggests otherwise, these mortgages aren’t generally as rigid as the interest rate. It is usually possible to overpay a fixed-rate mortgage – often by up to 10% of the total loan each year. This reduces the total interest you pay and helps to clear the balance sooner.
Many deals are also ‘portable’, allowing you to move house and take a mortgage rate with you. If this option is included, however, it is not guaranteed and is subject to eligibility.
Is it worth breaking a fixed-rate mortgage?
It can make sense to cut loose from a fixed-rate deal early in some circumstances.
Early repayment charges for mortgage deals are typically between 1% and 5% of the outstanding debt.
Lenders might operate a tiered charging system, reducing the exit penalty fee each year as the end of the term draws nearer. Any new mortgage deal needs to generate savings in excess of the fee to make an exit worthwhile.
What happens when fixed-rate mortgages end?
Borrowers are automatically put onto their lender’s standard variable rate.
The SVR is not competitive compared to other deals but has flexibility. For example, there will be no charge to switch away and you can usually overpay without restriction.
However, most people will benefit from choosing a new deal before they land on their lender’s SVR. Often borrowers can secure a new deal three to six months in advance of their fixed deal ending.