Updated 03 December 2020
A fixed rate mortgage is one that charges you a fixed rate of interest for the first few years – this may be two, three or five years, and sometimes even longer. At present they are the most popular type of mortgage, due to over a decade of the base interest rate being extremely low.
However, not all fixed rate mortgages are equally suitable for all homebuyers or homeowners. Read on to find out more about how they work, to help you decide which type of mortgage might be right for you.
With a fixed rate mortgage, you’ll know exactly how much your mortgage repayments will be, for as long as the deal period lasts. This is very useful for managing your finances, since you know exactly how to budget for each month. Even if your fixed rate mortgage is set at a higher interest rate than you could obtain today, you still have that certainty to reassure you.
You can also use a fixed rate mortgage to take advantage of periods of extremely low base interest rates (such as now). By fixing your mortgage rate when the base rate is rock-bottom, you can make the first few years of your mortgage much more affordable even if base rates were to rise. Unlike a tracker mortgage (which rises when the base rate rises) your fixed rate mortgage will stay the same until the deal period expires.
Some mortgages (such as variable and tracker mortgages) will reduce their interest rates when the Bank of England reduces the base rate. A fixed rate mortgage will not. Therefore there is always the chance that you will miss out on the benefits of a rate cut. That said, if you take out a fixed rate mortgage when rates are already extremely low, there is less to miss out on.
A minor disadvantage of a fixed rate mortgage is that they can sometimes be slightly more expensive than tracker mortgages. At times of super-low interest, the very lowest rates may be found with tracker mortgages. However, these tracker rates will rise if the base rate rises.
As the mortgage holder, you need to decide whether the greater certainty of a fixed rate outweighs the benefit of perhaps paying slightly less, if you’re lucky.
Choosing a fixed rate mortgage may be an easy decision, if rates are low enough. A trickier choice may be deciding how long to fix your rate for. You can opt for a shorter period (e.g. two or three years) or a longer one (five years, 10 years, sometimes even 15), and there are benefits and drawbacks to each option.
Fixing your mortgage’s interest rate for five years or more will obviously give you greater certainty in the medium term. A lot can happen in five years, which might cause the base interest rate to rise significantly, so you might not get such a good deal when the time comes to remortgage.
Furthermore, if you fix for a long time (such as 10 years or even 15 years) then you won’t have to remortgage until that deal expires. This can save you on the costs of remortgaging, as well as providing greater long-term stability.
On the negative side, the longer you fix your interest rate, the higher that interest rate is likely to be. Even if the rate is only a few tenths of a percentage point higher than the alternatives, this can make your repayments significantly more expensive over time. You may also be ‘locked in’ to the deal for longer, making it more costly to remortgage early.
You will tend to find the lowest fixed interest rates on the shortest fixed deals – i.e. the two-year deals. So if you are going for the cheapest possible repayments initially, without the uncertainty of a tracker mortgage, you would probably look at a two- or three-year fix.
If you are lucky, interest rates may still be low when your deal expires – in which case you could remortgage to another short-term fixed rate deal, and continue to save money in the same way.
On the negative side, interest rates may rise, in which case you may not get such a good deal with your next mortgage. You will also have to remortgage more frequently, which may cost you more in fees.
As you can see, choosing the right fixed rate for your mortgage is in large part a guessing game – you are ‘placing a bet’ on whether you think mortgage rates will rise or not, and by how much. A mortgage broker can help you work out the strategy that will be least costly to you in real terms, taking into account all factors including interest rates, early repayment charges, remortgaging fees, and of course the uncertainty of interest rate rises.
When the initial period of your mortgage comes to an end, your fixed rate deal will expire. You’ll still have the same mortgage, but your interest rate will no longer be fixed. Instead, it will move to your lender’s standard variable rate (SVR). This will nearly always be higher (other than in unusual circumstances, such as if you were to take out a fixed-rate mortgage during a period of high interest, only for base rates to fall very low).
In most cases you will want to remortgage as soon as possible after your deal expires, to avoid being on the SVR for a long time. However, there may be penalties for exiting your mortgage early, or you may get ‘stuck’ on the SVR for longer than expected (e.g. if your circumstances change and you can’t immediately remortgage).
It’s therefore important to check your lender’s SVR when choosing your mortgage, to see if it is relatively high or low compared to other providers. That said, even this is no guarantee, since a lender can change their SVR whenever and however they wish, and without warning.
An independent mortgage broker can search the whole of the market to find the best fixed rate deal for you. Don’t assume that longer deals are always better, or that the best deal is the one with the lowest interest rates or the lowest fees. Choosing the right mortgage deal is about finding the ideal balance between all those factors and more, and how these suit your circumstances and the market in general. With extensive experience of the market and of the circumstances you face, your mortgage broker will identify the best available deal and help you secure it.
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