As a mortgage payment has a good chance of being your biggest monthly expenditure, it’s a very good idea to know the ins and outs of the different types of products on offer. Fixed rate mortgages are one of the most popular mortgage products out there, but you may be wondering what they are, and what happens when my fixed rate mortgage ends? Whether you’re buying a house for the first time or looking to remortgage, read on for all the information you need.
What is a fixed rate mortgage?
With a fixed rate mortgage, you get a guaranteed interest rate which means your monthly payments are fixed for the term of your deal. There are more fixed rate mortgages available on the market than anything else, with homeowners enjoying the security and subsequent peace of mind they offer. This is because there’s no chance of your monthly payment increasing during the term of your contract, like with other products available.
How long can you fix a mortgage for?
Fixed rate mortgages are most commonly set for between two and five years. There are products on offer for longer, so you could secure a 7 or 10 year fixed rate mortgage if you wanted to. However, interest rates tend to be higher the longer your term. This is so the lender can guard against potential fluctuations in the market. Should the Bank of England base rate increase significantly, your lender would lose out if you were locked into a low-interest deal for many more years to come.
Of course, this would be to your benefit as the customer, which is why some people like to pay a higher rate now with the prospect of reaping the rewards in the future. There’s no right or wrong answer if you’re wondering how long to fix your mortgage for. A 2 year deal can be a great way to keep your monthly payments as low as possible, which can be good for first time buyers or if you’re thinking of moving home. On the other hand, you may prefer the long-term security of a 5 year fixed rate mortgage, which would mean you don’t have to worry about remortgaging for longer.
What happens when the fixed period ends?
At the end of your fixed term, your mortgage automatically switches to a standard variable rate (SVR) mortgage. This is set by each individual lender, and can go up or down at any point. The interest rate is usually considerably higher than during your fixed term, with the average SVR in 2019 around the 5% mark. This is compared to an average 2 year fixed mortgage rate of less than 3%, making your monthly payments significantly higher. That’s why it often makes great financial sense to remortgage before your fixed period comes to an end. You can do this up to six months before your deal is due to finish, whether you’re sticking with your current provider or moving to another lender.
Can you change mortgage before the fixed term ends?
If you want to switch your mortgage before the six month period when you’re allowed to remortgage, there are likely to be fees involved. Usually, early repayment charges are calculated by how much you’re repaying, which could be a large sum of money, especially if you haven’t had your home for very long. This is why a shorter fixed term can be a good idea if you’re thinking of moving in the near future. If not, look out for products which have low early repayment charges, or even better, none at all.
Fixed vs variable rate mortgages
With a variable rate mortgage, your monthly repayment is subject to change due to fluctuations in the interest rate. Discount and tracker mortgages are examples of variable rate deals, which are usually cheaper that fixed term mortgages. This is because they offer less security. Having said that, fierce competition between lenders means there are lots of fixed rate mortgages offering great value at the moment. This can mean you get the cheapest price along with the greatest peace of mind.
Fixed rate mortgage pros
Fixed rate mortgage cons
Is a fixed rate mortgage right for me?
At the moment, the Bank of England base rate is incredibly low. This means fixed rate mortgages are currently very cheap, particularly when you have a lower loan to value (LTV) ratio. They also offer great security for the duration of your contract, which lots of people like for their monthly budget. The length of the deal you go for or if you even decide to go for one at all is a personal choice though. If you want some more advice, or you’re looking for a conveyancer to help you with your fixed rate mortgage, don’t hesitate to get in touch with us.
Disclaimer: This article is for informal and general advice regarding fixed rate mortgages.