A Guide to Fixed-Rate Mortgages

The Mortgage Bank A guide to fixed-rate mortgages
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Fixed-rate mortgages can sometimes be pricier than variable deals, but in the long run can offer  homeowners security and predictability that is hard to put a price tag on. 

What Does ‘Fixed-Rate’ Mean?

A fixed-rate mortgage guarantees that the interest rate on your mortgage stays fixed, regardless of what national interest rates are doing. So, your monthly payments remain the same every month during the fixed-rate mortgage term.

The fixed-rate deal lasts for a given period of time- normally between 2 to 10 years.  After this introductory period, the mortgage switched to the lender’s Standard Variable Rate (SVR). 

In March 2020, the average interest rate on a 2-year fixed mortgage was 1.42%. 

Fixed-Rate: What Happens at the End of the Fixed Period?

At the end of a fixed-rate mortgage, your deal is moved on to the lender’s standard variable rate (SVR). This is normally less competitive than many rates market and is decided on by your lender. 

They have the power to change their SVR at any time, so be aware that the rate you used to plan your finances when you took out your mortgage might have changed by the time you reach the end of the fixed-rate deal. 

For this reason, many decide to remortgage (switch to a new lender) at the end of the introductory period. You normally can’t remortgage before this period is over, but are free to do so afterwards.

Most lenders will charge exit fees when you remortgage, so remember to look into these and budget for them if you’re planning to switch.

Fixed-Rate: How Long Does the Rate Stay Fixed?

You agree on the fixed-rate term when you first take out the mortgage. Most fixed-rate deals in the UK are for between 2-5 years, although some lenders now offer fixed-rate deals as long as 15 years. 

Bear in mind that if you decide to go with a longer fixed- rate deal, your monthly payments are likely to be slightly higher. This is because the longer your rate stays fixed, the more likely your lender is going to have to cover the cost of a jump in interest rates. 

Fixed-Rate: Who Is It For?

Anyone looking to take out a mortgage can consider a fixed-rate mortgage, and there are not special criteria for this kind of deal. In fact last year, over 95% of new mortgages were fixed-rate deals; they are extremely popular. 

Monthly Repayments5 year Fixed Rate2 year fixed Rate
March 2019£1063£1013
June£1063£1012
September£1063£1063
December£1063£1052
March 2020£1063£1122
5-year fixed-deal repayments for a £250,000, 25-year mortgage are based on the average interest rate offered in March 2019 for this kind of deal(2.03%). 2-year variable rate mortgage deal repayments for the same loan are based on the average interest rate offered per month for this kind of deal. Source: Global Property Guide; Bank of England 

This table shows how different mortgage deals can play out over time by comparing payments on a 25-year, £250,000 mortgage on two different deals. 

Can I Save Money With a Fixed-Rate Mortgage?

It is possible to save money on a fixed-rate mortgage, especially during an economic boom, when the interest on variable-rate mortgages tends to skyrocket. However, when interest rates are low, you could end up losing out. 

It’s fair to say that the main point of a fixed-rate mortgage is not to save money. Instead, it is to make your finances more predictable and give you peace of mind.

For many people, their mortgage is the greatest financial commitment they will ever make.  The beauty of a fixed-rate mortgage lies in the certainty of knowing exactly how much you need to pay  every month and being able to plan your budget round it. 

If you are still unsure whether to go with a fixed or variable rate mortgage, consider how you would cope if interest rates suddenly shot up. If you could afford to keep up with a significant increase in your monthly mortgage payments, it might be worth taking your your chances with a variable-rate mortgage. 

However, if you are like many people and have invested as much as you can afford in buying your home, you could find that you would struggle with a sudden hike in your mortgage repayments- even if you are relatively well off. 

ProsCons
Certainly that your payment will stay the same no matter what the national economy is doingYou’re tied in for the length of the introductory period
Helps you to plan your monthly budgetsCan be more expensive than variable-rate deals, especially if interest rates are low
Peace of mindYou’ll be moved on to a (usually) expensive SVR at the end of the introductory period
It can be expensive to remortgage after you’re on the SVR

How Can The Mortgage Bank Help?

Here at The Mortgage Bank, we have partnered with some of the UK’s leading mortgage brokers.

They have already helped thousands of people get the best remortgage deal even people that have been refused before, and they can do the same for you.

Choosing an independent adviser means they won’t recommend a scheme unless they are sure it is in your best interests. Their advice is also regulated by the FCA, which gives you an additional layer of protection.

If you would like to speak to one of these brokers who can provide you with a ‘whole market quote’ then click on the below and answer the very simple questions.

Len Burgess
Len Burgess
Len Burgess is a successful digital entrepreneur and founder of LBLK Publishing which specialises in Financial content. Len has been writing professionally on financial and business topics for 5 years before starting The Mortgage Bank.
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