What is a Fixed Rate Mortgage?
A fixed-rate mortgage means the interest rate does not change for the duration of the initial term, unlike a variable-rate mortgage, which changes with the Bank of England base rate.
The most common deals are for two- or three-year fixed-rate terms, although longer periods, such as lifetime or 30-year terms, are becoming more common. Some of the cheapest mortgages are for the shortest terms and remortgages from your current provider.
Advantages and Disadvantages of a Fixed-Term Mortgage
The main advantages of this type of mortgage is that you’ll always know the rate of interest you are paying for the term of the loan that you have signed up for.
If the Bank of England base rate increases and standard variable rates rise, your loan is guaranteed not to change so long as you are still within the fixed term of the plan.
Once the term for the fixed rates comes to an end, you’ll usually be placed on the lender’s standard variable rate (SVR) for the remainder of the term unless you decide to remortgage to another product or another fixed rate.
Every time you remortgage to a different product, you’ll have to pay a new product arrangement fee. Therefore, if these fees are £1,000 each time and you pay them every two years, the fixed rate of interest may not be low enough to offset the additional costs, which is a major disadvantage of remortgaging every couple of years.
Additionally, if you decide to exit your deal during the fixed term, there will likely be high switching costs, which can be 2% or 3% of the total loan or the amount outstanding. Some providers also get you to pay back any discount against their SVR, so read the terms and conditions of these products very carefully before committing yourself.
Advantages of a Fixed-Rate Mortgage
- The interest rate gets fixed for a known period of time.
- If the Bank of England base rate increases, your mortgage payments stay the same.
- You have the flexibility to choose from two, three, five or ten years for the term of your fixed rate.
Disadvantages of a Fixed-Rate Mortgage
- Some product fees are high.
- If the Bank of England base rate decreases, you can not take advantage of a lower rate.
- There could be penalties for early redemption.
What Type of Fixed Rate Mortgages are Available?
Most fixed-rate mortgages on the market at present are for two or three years because the banks and building societies have a low risk profile. There are longer-term deals available to fix rates for 10 years in some circumstances. The higher your deposit, the lower the interest rate you’ll pay. Fixed-rate mortgages are also available for buy-to-let landlords, but the rates are generally higher.
Choosing The Right Fixed Mortgage
If you believe a fixed-rate loan is the right product for your circumstances, then there are still plenty of options on the market. You’ll need to look at the total costs that you incur, as most arrangement fees for these types of products are at least £1,000 just to get the mortgage. Early redemption and exit penalties usually apply and can be as high as 2% or 3% of the outstanding balance.
These penalties may apply for the life of the mortgage or for the first two or three years of this type of fixed loan. In summary, although the interest rate may be favourable if you need to pay off your loan or want to switch out early, the costs of switching could be very high.