Fixed Rate Mortgages Explained

What is a fixed rate mortgage?

With a fixed rate mortgage, you have a set interest rate for an agreed term. This can be 2, 3 or 5 years, for example, or possibly even longer, such as 10 years. That way, you know exactly what you have to pay each month for your mortgage throughout that deal period. This is different from a standard variable rate (SVR) mortgage or tracker mortgage, which have fluctuating rates depending on whether interest rates in general rise or fall. With these types of mortgages, your monthly mortgage payments will vary accordingly.

How does a fixed rate mortgage work?

You agree to a fixed term for your mortgage deal with the lender, such as 2 or 5 years. Your mortgage interest rate is set for that term, no matter what happens with market conditions or the Bank of England’s base rate. Throughout that term, therefore, you have peace of mind knowing that your monthly mortgage payments will stay the same. Of course, if the base rate lowers, this means that you won’t benefit from a lower interest rate, which you would with a variable rate mortgage.

With a longer fixed term, such as 5 or 10 years, you’re likely to pay a higher interest rate than if taking a shorter term of 2 or 3 years. This is because the lender is taking on more risk. Depending on the level of security you prefer and your circumstances, you may prefer to have a longer fixed-rate deal despite having to pay a higher rate.

Once the fixed term ends, your interest rate will revert to the lender’s standard variable rate unless you switch to a new deal. The SVR tends to be higher than other rates so it’s best to start looking for a new deal when you have 6 months left of your fixed term. That way, you can lock in a more competitive rate so that you won’t automatically transfer to your lender’s SVR.

Why choose a fixed rate mortgage?

Having a fixed rate ensures that your mortgage interest rate will remain the same throughout the agreed term. This is regardless of what happens with the Bank of England’s base rate. If the base rate increases, for example, you won’t have to pay a higher amount. This provides security during the term of the fixed deal, ensuring that you’re protected against any potential increases in interest rates. It is also a good way to budget for your mortgage, especially if you’re a first-time buyer.

Fixed-rate deals tend to be cheaper than those with standard variable rates. SVRs are set by lenders and can change at any time and to any amount. If your current mortgage deal is coming to an end, switching to a fixed-rate deal can save you money compared with letting your deal automatically switch to your lender’s SVR.

Fixed rate mortgages also offer flexibility. You can choose the term you prefer for your fixed-rate deal to meet your needs. For example, you may be planning to move in the near future in which case a 2-year deal will suffice. If, however, you know that you’re going to stay put for longer, you may prefer a 5-year deal. You may also be able to make overpayments if you wish to without being penalised by an early repayment charge (ERC).

How long should you fix your mortgage for?

The length of the term that you fix your mortgage for really depends on your situation and preferences. You need to weigh up whether you prefer the security of having a longer fixed term or the cheaper cost of a short-term fixed rate. Whilst the rates for shorter terms are lower, you’ll need to remortgage sooner and incur the costs to do so as a result. A longer fixed deal provides you with more stability but if there’s a possibility you may need to move before then, this could prove difficult.

The most common fixed deals are for 2 years or 5 years. Some lenders also offer fixed terms for 3, 7 and 10 years or longer. A 3-year deal may be a good compromise if neither 2 or 5 years are suitable for your needs. A longer fixed term of 10 years may be ideal if you have no intention of moving and prioritise stability and peace of mind over costs. Below, we’ve compared the pros and cons of 2-year and 5-year fixed deals.

A 2-year fixed deal

If you prefer more flexibility than stability, then a 2-year fixed deal is a good option. It lets you review your deal again without being penalised with an early repayment charge. If rates are high at the point you take out your mortgage and you think they may come down in the near future, then a 2-year deal makes sense. That way, you can remortgage to a more competitive deal with a lower rate when the fixed term has ended. This saves you from missing out on lower rates if they suddenly drop rather than being tied to the higher rate you agreed to for a longer term.

A 2-year fixed deal is also the best choice if you know you’re going to move again quickly. It means that you won’t have to pay an early repayment charge, which you would if you were tied into a longer deal. However, you need to be aware that remortgaging more frequently also comes with extra costs so check that this doesn’t outweigh the benefits of having a lower rate and avoiding an ERC.

A 5-year fixed deal

Having a fixed deal for 5 years gives you more security as you don’t need to worry that your payments will increase if interest rates suddenly go up. Your rate will remain the same throughout your fixed term, protecting you from general rate hikes. This is a good option if rates are low at the point you take out your mortgage as you can benefit from a lower rate for longer.

If you’re not planning on moving in the near future, being tied to a 5-year deal means that there’s no need to pay remortgaging costs during that time. With 2-year deals, you’d have to remortgage every couple of years to avoid the lender’s SVR at the end of each term. As the remortgaging costs would then mount up, you stand to save a considerable amount by having a longer term.

What happens when the fixed-rate deal ends?

When the initial period ends, you’ll no longer benefit from the fixed rate and, instead, you’ll automatically switch to the lender’s standard variable rate unless you have already arranged a new deal. This deal can either be with your existing lender, which is known as a product transfer, or you can remortgage with a new lender.

SVRs are usually higher than other rates and each lender sets their own rate. This can change at any time, without warning, and by any amount. Therefore, it’s recommended to start looking for a new deal about 6 months before the end of the fixed term. That way, you can either lock in a new fixed-rate deal or change to a different type of variable-rate deal, depending on the available rates and your circumstances at that time.

How does a fixed rate mortgage differ from a variable rate mortgage?

With a fixed rate mortgage, the interest rate you pay is fixed for a specific period. Regardless of market conditions, the rate won’t change during that time. This ensures that you know exactly how much your monthly mortgage payments will be, giving you stability and peace of mind.

With a variable rate mortgage, the interest rate can fluctuate. This means that if market conditions change, the rate you pay will increase or decrease accordingly. There are different types of variable rate mortgages. A tracker mortgage typically tracks the Bank of England’s base rate so the interest rate will rise and fall in line with it. A discount mortgage has an interest rate that’s set at a percentage below the lender’s standard variable rate for a fixed term. Whilst the rate can go up and down, you can rest assured that you’ll pay a lower amount than the lender’s SVR.

Get expert advice from our mortgage brokers

Our mortgage brokers are here to offer impartial, expert advice on fixed rate mortgages as well as those with variable rates. For a fixed-term deal, they can offer guidance when it comes to deciding on the length of fixed term to opt for. They can discuss your circumstances and priorities, such as whether you prefer financial predictability with a longer term or more control over your mortgage in the short term. They can help you weigh up different aspects, such as factoring in the costs over different term lengths, including interest rates, remortgaging costs and early repayment charges.

Whatever you’re unsure of, just give our mortgage brokers a call on 01322 907 000 for professional guidance. If you prefer, send an email to us at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage specialists will reply to you as quickly as possible with more information. As well as helping with your fixed rate mortgage needs, we also offer other financial services, such as arranging insurance. This can include mortgage payment protection insurance as well as financial protection for your property, such as home insurance. 

The costs involved for a fixed rate mortgage

There are various costs to consider for a fixed rate mortgage, both when arranging it and if having to end your fixed-rate deal early. You need to think about the size of the mortgage loan, the interest rate payable on the loan and the length of the mortgage term. Whether you’ve chosen a repayment or interest-only mortgage also affects the overall cost. When arranging your fixed rate mortgage, you also need to factor the following costs into your budget:

• Arrangement fee: This is charged by the lender for arranging your mortgage. It may be a flat fee or charged as a percentage of your mortgage loan.
• Valuation and survey fees: The lender will need a valuation to be carried out to confirm the property’s value before issuing a mortgage offer. You should also have a survey carried out as this details the property’s condition and highlights any defects and repairs needed that you may otherwise be unaware of.
• Legal costs: Your solicitor or conveyancer will charge for carrying out the legal aspects of the transaction. These can include, among other aspects, checking the title deeds, carrying out the searches, handling money transfers and drawing up the contracts.
• Stamp duty: This tax is payable according to various thresholds. Use our stamp duty calculator to give you an idea of the amount you’ll need to pay.

If you wish to leave your fixed deal before the agreed term ends, you’ll more than likely be liable for an early repayment charge. This can be extremely expensive as it is usually charged as a percentage of your outstanding loan balance. Therefore, make sure that you’re aware of how much this will be before changing your deal. Our mortgage brokers can check this for you and discuss your situation to see if there’s a better solution.

Can you make overpayments on your fixed rate mortgage?

You can usually make overpayments on your fixed rate mortgage each year, depending on your lender’s terms. Typically, lenders allow you to overpay by up to 10% of the outstanding balance every year. If you go over this amount without prior consent from your lender, you’ll be liable to pay an early repayment charge. If you’re in a financial position to do so, making overpayments is a good way to reduce your outstanding mortgage balance quicker and, in turn, reduce the amount of interest that you’ll be charged on the loan.

The advantages of fixed rate mortgages

There are numerous benefits to choosing a fixed rate mortgage. These include:

• Financial predictability: With a fixed rate, you know exactly how much you need to pay each month, which is helpful for budgeting purposes.
• More affordable: A fixed interest rate is usually lower than a lender’s standard variable rate.
• Choice of fixed term: You can choose the length of your fixed-rate deal to suit your needs, such as 2, 3, 5 or even 10 years.
• Stability: Regardless of what happens with market conditions, your rate will remain the same throughout your fixed term. This means that if interest rates suddenly rise, your rate won’t be affected and you won’t need to worry about having to make higher payments.
• Make overpayments: You can usually make overpayments of up to 10% of your loan balance each year without being penalised.

The disadvantages of fixed rate mortgages

As with all mortgages, there are drawbacks to consider too. For fixed rate mortgages, these include:

• High arrangement fee: You may pay a higher arrangement fee for a fixed rate mortgage than for one with a variable rate as you have extra security that the rate won’t change.
• Higher interest rate: Mortgage deals with fixed rates tend to have higher interest rates than variable rate mortgages.
• No reduction if rates fall: If interest rates fall, your rate will remain the same so you won’t benefit from lower mortgage payments.
• Automatic switch to the lender’s SVR: Unless you have arranged a new deal to switch to at the end of your fixed term, your rate will automatically transfer to the lender’s standard variable rate. This will be a higher rate than the one you have been paying.
• Early repayment charge: If you want to leave your fixed-rate deal before the specified term ends or want to repay your mortgage early, you’ll be liable for an early repayment charge.

Considerations before applying for a fixed rate mortgage

Before applying for a fixed-rate deal, check how much the arrangement fee is. This is a fee that’s charged by the lender for arranging the mortgage and it can either be paid upfront or added to your mortgage loan. It’s possible that a mortgage deal with a higher interest rate but a lower arrangement fee may be cheaper than having a deal with a lower interest rate and a higher arrangement fee. Our mortgage brokers can compare the options for you so that you make the best choice.

If your circumstances change and you need to arrange a new deal before the fixed term has ended, an early repayment charge will be payable. It’s worth checking whether or not you can port your mortgage if you have to move during the fixed time frame. That way, you won’t need to arrange a new deal and, therefore, won’t be penalised with hefty fees.

Is a fixed rate mortgage right for you?

Having a fixed rate for a set period offers more security, especially at times when the market is volatile with fluctuating rates. It gives you peace of mind that your monthly mortgage payments won’t increase during that time. However, it also means that you won’t benefit from lower payments should interest rates fall, as you would with a variable rate mortgage. It also usually comes at a higher cost as the interest rate for a fixed deal tends to be higher.

Alternatives to a fixed rate mortgage

If you’re not sure whether a fixed rate mortgage is right for you, there are different variable-rate options to consider.

• Tracker mortgage: The interest rate for a tracker mortgage is usually linked to the Bank of England base rate (or another external rate). A set percentage is added to the base rate for the mortgage rate. When the base rate increases, the mortgage rate goes up, increasing your monthly payments. When the base rate drops, the mortgage rate falls and your monthly payments decrease accordingly.
• Discount mortgage: The interest rate for a discount mortgage is linked to the lender’s standard variable rate. It is set at a percentage that’s below the SVR. If the lender’s SVR increases, your mortgage rate and payments will go up. If the lender’s SVR drops, your mortgage rate and monthly payments will also come down.
• Standard variable rate mortgage: A standard variable rate is set by the lender and, as such, it can change at any time and by any amount. Your monthly payments can, therefore, go up or down without warning. This type of mortgage rate is usually the most expensive.
• Capped rate mortgage: With a variable rate, the interest rate for a capped rate mortgage goes up and down in line with the rate it’s linked to, such as the base rate or the lender’s SVR. However, a cap is set by the lender that the interest rate cannot exceed. This gives you some of the security that you’d have with a fixed rate mortgage. You can have peace of mind that even if interest rates keep increasing, your mortgage rate won’t go higher than the capped rate.

Benefit from the security of a fixed rate mortgage

If you’d feel more comfortable knowing exactly what you have to pay each month for your mortgage, a fixed rate mortgage is ideal. Choose the length of the fixed term to suit your needs and plans. For example, opt for a shorter term if you’d rather keep on top of the latest rates and change your deal regularly or are planning to move in the near future. Or go for a longer term if you’re planning on staying put and prefer to have financial predictability for longer.

With unrestricted access to the market, our mortgage brokers – located throughout Kent, London and Edinburgh – can compare the fixed-rate deals available to find the best one for your needs. They’ll ensure that you’re aware of any fees payable, such as arrangement fees and early repayment charges, and provide you with a comparison of the overall costs between different deals. That way, you can make an informed decision rather than simply opting for the lowest interest rate.

To get started with your fixed rate mortgage application, give us a call on 01322 907 000. Alternatively, send us an email at info@trinityfinance.co.uk or an enquiry via our contact form. One of our mortgage consultants will reply to you as quickly as possible with further information. As well as arranging your mortgage, we can help with other aspects of buying a property, such as arranging the insurance and putting protection in place for your mortgage payments.