A guide to fixed rate mortgages

A guide to fixed rate mortgages

Fixed rate mortgages are the most common type of mortgage for UK buyers.

But how does a fixed rate mortgage work and what happens when your fixed rate period is up?

We’ll explain everything you need to know here…


Types of mortgage

Fixed rate mortgages are only one of several types of home buying loan you’ll need to consider.

Other types of mortgage include variable rate mortgages like:

• Discounted rate mortgages

• Tracker mortgages

• Standard Variable Rate mortgages


Discounted rate mortgages

The interest rate you pay is a discount on the lender’s own Standard Variable Rate (SVR) for a fixed period of time.

So, if your lender is offering you a discount mortgage of 2% and their SVR is 5%, you’ll pay an interest rate of 3% typically for two or three years.


Tracker mortgages

These mortgages move in line with the Bank of England’s base interest rate, meaning you’ll usually pay the base rate plus a certain percentage for a fixed period of time.

For example, if you’re on a +1.5% tracker mortgage and the base rate is 0.5%, you’ll pay 2% interest on your mortgage for usually two or three years.


Standard variable rate mortgages

Each lender has its own standard variable interest rate, which you’ll move on to when your fixed term mortgage comes to an end – unless you remortgage on to a new deal.

Standard Variable Rates (SVRs) are generally higher than other mortgage deals, with the average SVR in the UK 4.41% at the beginning of 2021, according to Moneyfacts.


What is a fixed rate mortgage?

A fixed rate mortgage guarantees that your interest rate will stay the same for a certain period of time.

Fixed rate mortgages are the most popular kind of mortgage in the UK, as they give homeowners peace of mind that their mortgage payments won’t change, even if interest rates rise.


Is a fixed rate mortgage better than a variable rate?

Taking out a fixed rate mortgage means your monthly payments will stay the same for a certain period of time.

However, there are pros and cons to fixed rate mortgages:


Pros of fixed rate mortgages

• Peace of mind that your payments won’t change for the fixed rate period

• Attractive interest rates are available as lenders compete for business

• Interest is calculated on your outstanding balance, which is higher at the start of your term. So, by fixing your rate early in your mortgage, you can make good savings


Cons of fixed rate mortgages

• The peace of mind of a fixed rate often comes with an expensive mortgage arrangement fee

• Fixed rate mortgages lack flexibility if you wish to sell during your fixed term, with early repayment charges commonplace

• If interest rates fall, you could end up paying more

A variable rate mortgage, such as a tracker or discounted rate, can change at any time depending on changes to the Bank of England’s base rate or a lender’s Standard Variable Rate.

So, if interest rates fall, you’ll pay less.

But if they rise, you’ll pay more.

Which type of mortgage is best for you will depend on your circumstances and whether you want the peace of mind of a fixed rate, or are happy to take more risk with a variable rate loan.

Always seek advice from an independent mortgage broker when working out what kind of mortgage will be best for you.


How long can you fix a mortgage rate for?

Most fixed rate mortgages are offered on a two, three or five-year term, meaning the interest rate you pay will remain the same for that period of time.

However, some seven and 10-year fixed rate mortgages are available, although these are often reserved for buyers with a low loan to value of 60-65%.


Should I take out a two or five-year fixed rate?

How long you wish to fix your mortgage rate for depends on your personal circumstances.

If you are planning to sell up and move to a new property within five years, you may have to pay an early repayment charge if you take out a five-year fixed rate deal.

And if interest rates fall, you could end up paying more for longer.

However, if interest rates rise and you’re on a two-year fixed rate, your repayments could rise sooner than if you were tied into a longer deal.

Always consider your plans for the next five to 10 years when taking out a new mortgage and try to factor in any potential rise or fall in interest rates.


Are there one-year fixed rate mortgages?

One-year fixed rate mortgages are extremely rare.

A search on Moneyfacts in June 2021 found no available mortgages with a one-year fixed interest rate.


Average two-year fixed rate mortgages

According to Moneyfacts, the average two-year fixed mortgage rate was 2.57% in March 2021 – 0.14% higher than in March 2020.


Average five-year fixed mortgage rates

The average five-year fixed mortgage rate was 2.75% in March 2021, according to Moneyfacts data – just 0.01% higher than 12 months earlier.


What happens when my fixed rate mortgage ends?

When your fixed rate mortgage term comes to an end, you’ll move to your lender’s Standard Variable Rate (SVR).

That will almost certainly see your monthly repayments rise – taking into account the UK’s average SVR of 4.41% compared with average fixed rates of between 2.57% and 2.75%.

If you’re thinking of moving shortly after your fixed rate ends, staying on your lender’s SVR means you’re unlikely to face any early repayment charges.

But if you’re staying put, you should start to look for a new deal several months before your fixed rate period is due to end to avoid an increase in payments.


Can you break a fixed mortgage agreement?

Almost all fixed rate mortgages come with early repayment charges if you want to get out of the deal early.

Some early repayment fees will be fixed for the duration of the fixed rate term, which means you’d pay the same charge regardless of how far into your deal you are.

Others are tiered throughout the fixed term, meaning the charges decrease after each year.

Tiered early repayment charges are usually based on a percentage of your outstanding balance.

For example, with a mortgage of £150,000 on a five-year fixed rate, you could face the following early repayment charges:


Year

Early repayment %

Amount payable

1

5%

£7,500

2

4%

£6,000

3

3%

£4,500

4

2%

£3,000

5

1%

£1,500


Exactly how much you may have to pay in early repayment charges will depend on the terms of your mortgage agreement and your lender’s individual policies, however.


What fees do I pay on a fixed rate mortgage?

Many fixed rate mortgages come with up-front fees – usually labelled ‘arrangement’ or ‘product’ fees.

At the end of 2020, the average fixed rate mortgage fee in the UK was just over £1,000, according to Moneyfacts, with only 34% of available fixed rates coming with no fee at all.


Further reading…

If you’re looking to take on a mortgage, there are lots of steps you can take to improve your chances of being accepted – our guide explains everything you need to know.

First-time buyers, meanwhile, have been boosted by the government’s 95% mortgage guarantee scheme. We’ve explained what’s involved here.

And if property investment is something that interests you, take a look at our guide for beginners.