If you’re a homeowner, or in the market for your first home, you’ll be no stranger to the role of mortgage rates and the impact they can have on your mortgage payments.
Mortgage rates dictate the amount of interest you pay each month, partially based on wider economic factors outside of your control. This means that you may pay more—or less—towards your mortgage, depending on the strength of the market.
It’s easy to see why many homeowners would prefer more predictable payments, especially in an increasingly uncertain economy. This is where the different types of mortgage come into play.
While terms like “fixed rate” and “variable rate” might seem technical at first, they’re simple once you understand the basics.
In this guide, we’ll explain fixed rate mortgages in detail, so you can decide whether a fixed rate makes sense for your circumstances and the current economic climate.
What is a fixed rate mortgage?
A fixed rate mortgage is a first charge mortgage, used to pay for a property, for which the interest rate is guaranteed to stay the same for a set amount of time.
This allows for more predictable monthly mortgage payments, which could result in lower payments in situations where the interest rate would otherwise increase.
On the other hand, if mortgage rates go down while you’re on the fixed rate period, you’ll be stuck paying more.
How does a fixed rate mortgage work?
To understand fixed rate mortgages in more detail, we need to dig deeper into mortgage rates and how they are calculated.
A mortgage is a special type of secured loan, used to pay for a property. Mortgage interest rates—commonly referred to as mortgage rates—determine how much the balance of your loan will grow each month and, therefore, how much you pay.
With a typical repayment mortgage, you’ll repay a set amount of your remaining loan balance each month, plus interest.
The interest rate that is applied will be determined by the lender, and will vary based on the type of mortgage you are on.
With a fixed rate mortgage, you will be on a set interest rate that stays the same until the end of your fixed rate period—at which point you will be switched to a variable rate.
With a variable rate mortgage, your interest rate will fluctuate depending on a number of factors, such as the base rate set by the Bank of England. There are different types of variable rate mortgage, each of which calculate their interest slightly differently. Broadly speaking however, a variable rate mortgage will shift inline with the market and wider economic factors.
Fixed rate mortgage pros & cons
Now that we’ve covered the basics, let’s review some of the key benefits—and potential drawbacks—of fixed rate mortgages.
Advantages of fixed rate mortgages
- More predictable, as you always know what you are going to pay during the fixed period
- You might save money on your monthly payments, if the interest rates go up while you’re on a fixed rate
Disadvantages of fixed rate mortgages
- You might pay more for your mortgage each month, if the interest rates go down while you’re on a fixed rate
- If rates are already very low, a fixed rate mortgage might have a higher rate than a tracker mortgage, which follows the Bank of England base rate more closely
What happens when a fixed rate mortgage ends?
When your initial fixed rate mortgage period ends, the fixed rate will expire and you’ll be automatically switched to the lender’s standard variable rate (SVR).
You’ll still be on the same mortgage, but your payments will change to reflect the new interest rate.
In almost all cases, the standard variable rate will be higher than the fixed rate, meaning you’ll be paying more for your mortgage each month. In a few rare cases you may pay less, for example if you took out your fixed rate mortgage at a time when rates were very high and they have since dropped to very low levels.
Given your payments will often be higher once your fixed period ends, it’s worth thinking about the options available to you.
What are my options at the end of the fixed rate period?
Just because your fixed rate period has ended, it doesn’t necessarily mean you’re stuck with the interest rate you are switched to.
Here’s a quick rundown of the options available to you once your fixed rate has expired.
Stay on the standard variable rate (SVR)
If you are happy with the rate you are moved to, and don’t want to go through the hassle of remortgaging, then you can of course stay on the lender’s standard variable rate.
However, in most cases, it’s worth considering remortgaging in order to get a more favourable rate and reduce your monthly payments.
Remortgage to get a new rate
When you remortgage, you apply for a new mortgage, based on the remaining value of your property. It’s worth bearing in mind that you can lock in a new mortgage rate up to six months before your current fixed rate term comes to an end.
Not only is remortgaging a helpful way to free up some cash by releasing equity in your property, it can also help to get you back onto a preferable mortgage rate, even another fixed rate.
It’s worth noting that your current mortgage may apply an exit fee, otherwise known as an early repayment charge, which will be detailed in the terms of the agreement. This is most commonly applied if you want to remortgage in the middle of your fixed-rate term. It usually won’t apply in the three to six months before your fixed rate ends, but it’s always worth double checking your mortgage terms and running through your options with a mortgage adviser.
How long does the fixed rate period last?
A fixed rate period on a mortgage can last anything from 1 to 10 years, in some cases it can stretch even further.
Opting for a fixed rate mortgage can often be an easy decision, but choosing a fixed rate term might not be so simple. After all, there’s a lot to consider.
With a shorter fixed rate period, you will typically have lower interest rates and therefore lower monthly mortgage payments. But this comes at the cost of a greater risk of higher rates at the end of the fixed period, if it looks like interest rates are set to go up.
Whereas with a longer interest rate, you have predictability and security over a longer period, though you may end up kicking yourself if interest rates drop considerably. With a longer term, you have the additional benefit of not needing to remortgage—or pay the associated fees—as regularly.
2 year fixed rate mortgages
2 year fixed rate mortgages are common amongst those looking for a shorter fixed term. You won’t have the security of a longer-term fixed rate, but you’ll have the benefit of flexibility, allowing you to remortgage to a new fixed rate after 2 years.
It’s worth keeping in mind that, with shorter fixed rate terms, you will be paying remortgaging fees more often. You may also find yourself paying more when you remortgage to a new rate, if interest rates have gone up in general.
5 year fixed rate mortgages
A 5 year fixed rate can be an appealing option for those looking for the best of both worlds.
Short enough to remain flexible, while long enough to provide security and predictability for monthly payments.
10 year fixed rate mortgages
For those looking for something longer term, a 10 year fixed rate mortgage can provide consistency, with manageable payments over a longer period.
If you’re happy with the current interest rates, it might make sense to fix it over a 10 year period.
However, bear in-mind that this goes both ways, and you may need to pay fees if you move home or want to make any changes during your fixed rate period.
What are my options during the fixed rate period?
There are a number of reasons why you might need to make changes during the fixed rate period of your mortgage—such as moving home, or needing to remortgage to release some of the equity in your home.
Can you change your fixed rate mortgage?
Yes, it is usually possible to remortgage during the fixed rate period of your mortgage. However, lenders will often require you to pay an early repayment charge for doing this, which can often be a substantial amount.
If you are nearing the end of your fixed term, your mortgage provider may be willing to waive the exit fee and may even reach out to you to start the process.
Generally speaking, it’s only worth changing your mortgage during the fixed rate period if the savings are higher than the amount you’ll be charged for exiting early.
Can you extend the mortgage term during a fixed rate period?
In some cases, lenders may allow you to extend your mortgage while you are in the fixed rate period.
Note that this will not change the length of the fixed rate period, but the repayment term of the mortgage overall. This means that you will pay less each month, as you are spreading the cost over a longer period, but you will pay more in interest overall.
Can I leave a fixed rate mortgage early?
It is possible to leave a fixed rate mortgage early but, by doing so, you will be required to pay an exit fee or early repayment charge. These can often be substantial, so it’s only worth doing if you’re willing to pay the fee, or expect to make a greater saving as a result.
Why might you want to leave a fixed rate mortgage early?
There are a number of reasons why you might want to leave or change your mortgage early, during your fixed rate period.
A common reason might be that you want to move home. In these cases, you can also consider porting your mortgage.
Alternatively, you may be hoping to remortgage to release the equity in your home and free up some extra cash.
What are the other types of mortgage?
Here are some of the other types of mortgage, as well as common mortgage terms you may come across during your search.
Repayment mortgages require you to repay some of the loan value and the interest each month, they are the standard method for mortgage payment.
Repayment mortgages allow you to gradually pay off the debt and interest over a long period, making it more manageable.
Repayment mortgages can then be either fixed, variable or tracker mortgage, depending on which feels right for you.
Unlike repayment mortgages, with an interest-only mortgage you are only required to pay the interest each month. You don’t need to repay the amount borrowed until the end of the mortgage.
This can be helpful if you want smaller monthly payments and have a clear plan for how you will repay the mortgage at the end of the term.
But it’s harder to find an interest-only mortgage as a first time buyer, and you need to be sure you can repay the debt when the term is up.
Interest-only mortgages are more common for buy-to-let purposes, where the owner is making a regular income from the property and wants to increase their profits by having lower mortgage repayments. The owner can then sell the property at the end of the mortgage term to repay the amount owed, while pocketing any equity built up.
A tracker mortgage is a type of variable rate mortgage, in which the interest rates closely follow the base rate from the Bank of England.
This means repayments can go down or up, just like the standard variable rate (SVR), only monthly payments will typically be lower.
Speak to an adviser about your fixed rate mortgage options today
Are you ready to explore your mortgage options?
Taking the first step can be scary, but we’re here to help. Head over to our Aro Mortgages to discuss your fixed rate mortgage options with our partner Cream Financial Solutions today.
Think carefully before securing debts against your home.
Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.