An interest rate that stays the same
Fixed-rate mortgage loans are the most common product in the UK mortgage market, with the vast majority of first-time buyers and mortgage borrowers seeking the reliability of a fixed-rate loan.
When you choose a fixed-rate mortgage, the amount you pay every month will be fixed for a specified time period – no matter what happens to the Bank of England base rate and the standard variable rate offered by your mortgage lender.
Locking into a fixed-rate mortgage is a good option if you prefer to know exactly how much you'll be paying out each month. This type of mortgage is really handy for those of you on a tight budget. Fixed-rate mortgages are also useful if base rate is likely to rise because you can be reassured that you will still be paying out the same amount no matter what happens to interest rates. If you know you wouldn't be able to afford an increase in your monthly mortgage repayments, a fixed-rate mortgage could be right for you.
You have a mortgage for £160,000 and choose a five-year fixed rate deal at 4%.
Your monthly repayments are £853.49 over a 25-year term on a repayment basis
After the five years is up, you are moved onto the lender's standard variable rate (SVR) and it is then time to remortgage.
Typically you can choose a fixed-rate mortgage for two, three or five years. You may also be able to fix your mortgage for as long as ten years, but these deals are currently few and far behind. Generally, the longer you fix, the higher the interest rate will be. But fixed-rate mortgages overall are at very low levels right now, so this could be the perfect time to choose a fixed-rate mortgage before rates start to rise.
The advantage of fixing for a long period is that you won't have to worry about your repayments increasing during that time – as you would with a variable rate mortgage. You also won't have to worry about remortgaging every couple of years and paying out expensive fees every time you do so – as the example below shows.
You take out two-year mortgage deals for a period of 25 years...
This means you'd switch deals about 12 times...
If you paid a fee of £1,500 each time...
This would total £18,000 (if you paid the fees upfront).
You take out five-year mortgage deals for a period of 25 years...
This means you'd switch deals five times...
If you paid a fee of £1,500 each time...
This would total £7,500 (if you paid the fees upfront)...
Saving you £10,500.
However, the downside is that it's difficult to predict how interest rates will behave over the coming years. The risk is that you fix for too long and your deal actually becomes uncompetitive a few years down the line. This would mean you'd be stuck paying an interest rate that could be too high compared with what's on offer across the rest of the market.
What's more, if you need to move house during the term of your fix, you could have to cough up an expensive early repayment charge to get out. This could be as much as 5% of your remaining mortgage. For example, if your remaining mortgage came to £150,000 and you wanted to pull out of your five-year fixed-rate mortgage after three years, with a 5% fee, you'd have to pay £7,500. That's a pretty hefty sum to cough up.
Despite these disadvantages and no matter what interest rates do, you do still need to keep in mind that if you would struggle financially if interest rates increased, a fixed-rate mortgage is a sensible option.
Although mortgage interest rates are closely linked to the Bank of England base rate, there are other factors that influence fixed-rate mortgages. Banks have their own rate they use when lending to each other known as LIBOR (London Interbank Offered Rate) and the money markets have rates they fix for longer-term lending known as swap rates. You can find out more about these in our section on interest rates.
Best of both worlds
If you're undecided about whether to go for a fixed-rate mortgage or a variable mortgage, some deals let borrowers have the best of both worlds. Some lenders offer deals where you have a low rate tracker for a few years and then move onto a fixed-rate loan with the interest rate set at the outset. Others will give you a tracker with the option to switch penalty-free to a fixed-rate deal with the same lender later on.
However, be aware that while these offers are tempting, they don't necessarily mean you will be getting the best rate of interest. In fact, you can often get a more competitive deal elsewhere, but obviously the mortgage won't be as flexible. What's more, when you decide to fix, this is probably going to be because interest rates are on the rise and as a result, the fixed-rate you receive could be a lot higher than the rate you'd have received if you had chosen a longer fixed-rate mortgage at the start.
- With a fixed-rate mortgage, your repayments stay the same
- If you're worried about rising interest rates, fix for longer
- Check the early repayment charge if you need to leave the deal early
A fixed-rate mortgage is great for those of you on a tight budget