What Does Fixed Rate Mean?
A fixed-rate mortgage is a mortgage where, for a fixed amount of time, the interest rate is guaranteed to stay the same.
This means you’ll know exactly how much you need to pay every month while you’re on it. The security of knowing what to expect from your mortgage bill each month is one of the things that makes fixed-rate deals one of the most popular types in the UK.
It’s also the most common kind mortgage deal on the market, so it’s worth making sure you to understand what to look for before you go shopping.
How Do Fixed-rate Mortgages Work?
When you make monthly repayments on a mortgage, a portion of that payment goes towards paying off the money you borrowed, and a portion goes towards paying off the interest on your sum.
With a fixed-rate mortgage, the interest rate charged on your debt remains constant throughout the deal, so your monthly payments won’t change.
This can help with budgeting and provides assurance that you’ll be able to afford your mortgage payment as long as you stay on the deal.
On a variable rate mortgage, the interest rate charged on your debt can go up and down. This means that the amount you have to pay each month is liable to change.
While this can save you money if interest rates are low, it can also cause financial problems when rates start to climb again. A change of just half a percentage point could translate into a shortfall if you’re on a tight budget.
With a fixed-rate mortgage, that uncertainty is eliminated because the lender agrees to take on the risk of interest rate variations, instead of passing it on to you, the borrower.
To offset the risk that they could make a loss, lenders tend to charge slightly higher fixed interest rates than the rates available on their very cheapest deals (such as tracker mortgages). However, many people are willing to forgo potential savings on a cheaper deal for peace of mind with a fixed rate.
Most fixed-rate mortgages last for between 2-5 years, but some may stretch up to 15 years. As a rule of thumb, longer deals tend to have higher interest rates. This is to protect the lender- if they guarantee a fixed rate for ten years, there is a higher chance that there will be a spike in interest rates at some point during the deal when they would normally be able to make additional profits.
Comparison Of Average Interest Rates On Different Fixed-Rate Mortgages
|Deal length||December 2018||June 2019||December 2019|
|2 year deal||2.51%||2.49%||2.44%|
|5 year deal||2.92%||2.85%||2.74%|
|10 year deal||3.08%||3.00%||2.77%|
What Happens After The Fixed-rate Deal Ends?
At the end of a fixed-rate mortgage deal, you are moved onto your lender’s ‘Standard Variable Rate’ mortgage. This tends to be the most expensive interest rate a mortgage provider has on offer and is also a variable rate contract.
Because of this, you should be prepared for your monthly payments to increase at the end of the deal and possibly change from month to month.
To avoid these higher, unpredictable payments, many people choose to remortgage at the end of a mortgage deal.
How Can I Remortgage On A Fixed-rate Deal?
Most fixed-rate mortgages charge early repayment fees if you want to leave the mortgage before the introductory period is over. If you plan to remortgage in order to avoid higher repayments at the end of the deal, it may be worth waiting until you are moved to the lender’s standard variable rate mortgage- most SVRs have low exit fees, and some don’t have any at all.
If you know you’re likely to move soon and like the sound of a fixed rate deal- but aren’t so keen on the early repayments fees, you could consider one of the shorter deals.
At the end of your two years, you would be moved on to the lender’s standard variable rate and be ready to move without having to face steep exit fees.
Fixed-rate Mortgages Pros And Cons
|You’ll always know how much to budget for||You could lose out on potential savings if interest rates fall on variable mortgages|
|Knowing your payments won’t climb out of your reach, offers peace of mind||Can be costly to leave before the end of the deal|
|Can still be cheap at times when interest rates are generally quite low|
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.