Fixed Rate Mortgages
It is important to understand the different types of mortgages available. A fixed rate mortgage is one of the most common options, and it offers certainty and stability. Here we’ll take a closer look at what a fixed rate mortgage is and how it can benefit you as a homebuyer.
The following topics are covered below:
What is a fixed rate mortgage?
A fixed rate mortgage is one in which the interest rate is guaranteed to remain constant for a defined length of time i.e 2 years or 5 years. This can provide comfort since, unlike a variable-rate mortgage (such as a discounted or tracker rate), you will know precisely how much you will pay each month throughout this period.
Fixed-rate mortgages are typically for two, five, or ten years. This means that irrespective of changes in the Bank of England base rate, your monthly repayments will remain constant during that time. However, you can arrange your budget more easily because you know your monthly repayments will always be the same. Fixed mortgages are often slightly more expensive than variable discount or tracker mortgages, in terms of rates.
It would help if you examined the overall cost of the mortgage over the entire fixed period to locate the cheapest fixed rate mortgage. If a mortgage has the lowest interest rate but a high set-up charge, it may not be the most cost-effective alternative. A financial advisor would be able to help you determine which options would be most feasible for you.
The biggest disadvantage of a two-year fixed-rate mortgage is that the low fixed rate only lasts for two years. After two years, you will be shifted to the lender’s SVR, which might range from 4.5-6.5%, depending on current market conditions. This might have a significant impact on your mortgage payments each month, as they would be significantly higher. To avoid this, it is always best to approach a mortgage advisor with good time (usually 2-3 months before your current mortgage fixed rate ends).
You can remortgage and move to a new lender if your present lender offers you another fixed rate product, which you are not happy with and may not be feasible for you. However, bear in mind that most mortgages come with set-up expenses. For example, a booking or arrangement fee may vary from £995-£1,995 as standard, as are additional fees for a valuation or survey.
How long can an interest rate be fixed for?
Your mortgage rate can be fixed for one, two, three, five, seven or ten years. In favourable market conditions, the longer your fixed-rate period lasts, the higher the interest rate will be, in general. This is because it is more difficult for a lender to forecast what will happen in the market over a longer period, so you are essentially paying for the assurance that your rate will not go up regardless of what happens in the market.
A mortgage advisor can also assist you in considering your unique circumstances in respect to your mortgage. For example, if you plan to change professions careers, Maternity, or marriage, all these factors can potentially influence how long a fixed rate mortgage is appropriate for you.
What are the fees on a fixed rate mortgage?
Your fixed-rate repayment amount will be determined by several factors, which are:
- Your borrowing amount (Loan)
- The interest rate you will be paying and the length of your overall mortgage (e.g. 25years, or 30 Years)
- Whether you have a capital repayment or interest-only mortgage.
- Any upfront costs associated with a fixed rate product
- If you are purchasing a new home, you will likely have additional expenditures such as a deposit, legal fees, and any stamp duty you’ll have to pay
What are the early repayment charges like?
An early repayment charge (ERC) is a fee charged by your lender if you pay off your mortgage earlier than planned, or if you plan to pay more than the lender allows at a particular time. A tie-in time is common in many mortgage deals. For example, if you try to remortgaging a two-year fixed rate mortgage within the two-year period, you may be charged an ERC at a percentage which will be illustrated in your mortgage offer document.
If you intending to pay the ERC, you may be able to pay it upfront or include it in your new mortgage if you are remortgaging, if lenders permit. However, keep in mind that you will have to pay interest on the ERC after that. If your mortgage has an ERC associated with it, your mortgage illustration will show you how much it would cost. If you need to quit your fixed-rate mortgage before the end of the fixed term (for example, selling your home or transferring to a cheaper deal with an alternate lender), you will in most cases be fined an Early Repayment Charge (ERC). An Early Repayment Charge is usually calculated as a percentage of the outstanding mortgage and ranges from 1% to 5%. Although 1% may not appear to be a significant penalty, it can add up quickly if your outstanding sum is large (for example, 1% on a £200,000 loan is £2,000). When it comes to big high-street lenders like NatWest, Nationwide, Halifax, HSBC, and Lloyds Bank, the percentage can sometimes decrease the longer you have had your arrangement.
What are the overpayments like?
Check with your creditor to know if you can overpay your mortgage without incurring penalties and if there are any limits on how much you can overpay.
There is usually no limit to how much you can overpay your mortgage if you are on your lender’s ordinary variable rate or a tracker mortgage. On the other hand, fixed rate mortgages usually have an annual overpayment maximum of 10% of your total outstanding mortgage balance. As each lenders technique for calculating this 10% varies, use our calculator as a suggestion only and talk to your creditor to figure out precisely how much you can overpay.
Also, be sure that any extra money goes toward paying down the debt (shortening the period) rather than lowering your monthly payments. This calculator assumes you want to pay down your mortgage debt, which is the major advantage of paying extra. With a fixed rate mortgage, your capacity to make overpayments is limited. In addition, early repayment charges (ERCs) may apply if you overpay by a significant amount, in some cases wiping out a portion of the savings you were hoping to make.
Some variable mortgages, on the other hand, do not charge ERCs. In that situation, you can at least switch to a fixed-rate mortgage if interest rates start to rise, and you are worried about being able to afford the payments in the future as a consequence of the potential rate hike. That way, you can have some peace of mind about your payments without having to pay thousands of pounds for the right of repaying and switching to an alternate lender and product. It can also come in handy if you wish to make hefty overpayments or pay off your debt sooner.
Conclusively, it is important to note that your specific scenario will determine whether a fixed, discount, or tracker mortgage is better for you. The primary distinction is that fixed rates stay the same for the full introductory deal time or “fixed term.” In contrast, typical discounted and tracker rate mortgages move immediately following the Bank of England base rate and are above or below it by a defined margin for the entire introductory deal period.
