What is a fixed rate mortgage?
When you apply for a mortgage or remortgage you need to choose which of the available interest rate products you would like.
There are broadly 2 types:
- interest rates which change (variable) and
- interest rates that stay the same (fixed).
A fixed interest rate mortgage is a type of mortgage where the interest rate remains fixed for a set period of time.
EXAMPLE
4.75% fixed for 2 years
In the example above your mortgage payments will be calculated at 4.75% over the 2 year period.
Fixed rates help with monthly budgeting as your repayments don’t change. Importantly, your fixed rate is unaffected by changes to other interest rates, so whether they go up or down, your monthly repayments will stay the same.
If you had a tracker rate or variable rate instead then your monthly payments would be recalculated each time the Bank of England announced a new base rate.
What are the different types of fixed rate mortgage?
Fixed interest rate mortgages are available in a range of different terms, usually between one and ten years. You will need to decide how long you want your fixed rate mortgage to last before you apply.
Different mortgage lenders will have their own fixed rates to choose from, all with varying durations and fees.
It is common for lenders to specify a maximum Loan to Value (LTV) for their fixed products.
EXAMPLE
4.75% fixed for 2 years – Max 85% LTV
This example has a max LTV of 85% so you would need at least a 15% deposit to be able to choose this product.
Many lenders will offer cheaper rates for lower LTV’s, so as their mortgage risk is reduced they can lower the rates charged.
| EXAMPLE | |
|---|---|
| LOAN TO VALUE (LTV) | 2 YEAR FIXED INTEREST RATE |
| 90% | 5.23% |
| 75% | 4.59% |
| 60% | 4.63% |
Fixed rate terms
Residential mortgages typically have fixed terms that last between 2 and 5 years.
2-year fixed rate mortgages offer a compelling combination of affordability and security. Their widespread availability drives competition among lenders, often resulting in the most attractive interest rates within the fixed-rate market. If you seek payment predictability and plan to stay in your current home for the near future, these mortgages are well worth considering.
5-year fixed mortgage rates offer a balance of stability and flexibility, making them highly sought-after by homeowners. This option is ideal if you envision staying in your property for several years, but anticipate potential changes down the line. Predictable payments and peace of mind, without the commitment of an ultra-long-term fix.
10-year fixed rate mortgages, or longer, are not widely available in the UK. There’s a few options up to 10 years, but not much after this. However, it is possible to get a whole term fixed rate mortgage, with durations of between 15-40 years. They offer portability and there’s no SVR and no need to remortgage every few years. Payment certainty for the whole mortgage term.
Can you make overpayments?
A mortgage overpayment is any additional payment you make over your usual monthly payment. Overpayments can either be a single lump sum or a regular overpayment made throughout the year, each month for example.
Each lender sets their own rules but many do now allow overpayments of upto 10% per annum without incurring any early repayment charges.
If this is important to you then it’s wise to ask your broker to clarify what limits there may be for overpayments.
You will always be allowed to make an additional payment of any size towards your mortgage. However, this may incur charges so you should check beforehand.
Mortgages for professionals
Certain occupations are classified as ‘professional’ by some lenders. These professional occupations include; doctors, dentists, solicitors etc.
If you qualify, you could benefit from some of the enhanced mortgage options, like higher income multiples and reduced fees.
It’s also common for lenders to allow you to overpay by 20% pa, rather than the standard 10%pa.
Fixed rate pros
Best for financial budgeting and protection from any interest rate rises.
Fixed rate cons
If the base rate falls your fixed rate won’t change, so you may be paying more than you would like.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
What happens when the fixed rate ends?
Your fixed rate product will end on a specific date, check your paperwork to see when this is.
Your existing mortgage company will write to you a few months before this date to offer you some new rates to choose from.
At this point you will have 3 options:
DO NOTHING!
We definitely don’t recommend this one! If you don’t respond to the letter then your lender will transfer your mortgage over to their Standard Variable Interest Rate (SVR). This is normally quite a bit higher than the rate you were paying and is to be avoided.
PRODUCT TRANSFER
Choose one of your lender’s new interest rates and stay with them. This is the simplest option. See how we can help with mortgage product transfers.
REMORTGAGE
Transfer your whole mortgage to a new lender and select one of their products. You may find our Guide to Remortgaging useful.
Each time a fixed rate period ends you will need to decide what to do to avoid being overcharged. If you find this time consuming simply let your mortgage broker sort it out for you.
You will find more useful information in our article: What happens when a fixed rate mortgage ends?
Mortgage Early Repayment Charges (ERCs)
Early Repayment Charges, or ERC’s, are exit fees that apply during the fixed interest rate product term.
You will have to pay ERC’s if you want to leave your current mortgage interest deal before the product end date, or make overpayments in excess of what is permitted. Once you have moved over to your lender’s standard variable rate there are rarely any ERC’s to pay.
QUICK TIP!
This is a quick tip that may help if you wish to make a lump sum overpayment but are within the product ERC period.
Early Repayment Charges are quite onerous so it is rarely a good idea to incur them deliberately.
But how can you reduce your mortgage without paying these fees?
First pay off the maximum possible without exit fees, often this is 10% of the original mortgage.
Then you will need to get your timing just right but by making the extra overpayment after the fixed rate period but before any new product starts you should avoid any penalties. Remember to confirm this with the lender beforehand.
It’s less of an issue when remortgaging.
Can you move home with a fixed rate mortgage?
Can I move my mortgage to another house?
You will find more useful information in our Guide to Early Repayment Charges.
Fixed rate portability
If you are still in a fixed rate but want to move what are your option?. If you pay the mortgage off early there will be penalties to pay.
Some mortgages are portable, enabling you to take your fixed rate to the new house. Learn how porting a mortgage works.
Fees
Fixed rate deals usually come with an up-front fee. Some lenders will allow you to add this to the mortgage instead of paying it from your own money.
Although this seems very generous of them, be aware that you will be paying extra interest for ‘borrowing’ the product fee.
You will find more useful information in our article: “A Guide to Mortgage Fees“
FAQ
Frequently Asked Questions
Are fixed rate mortgages portable?
Most fixed rate products offer the option to port, or transfer, the mortgage rate over to a new property. You will need to stay with the same lender to do this.
Are fixed rates popular?
Yes, fixed rates are the most popular choice for over half of mortgage borrowers each year.
How do I get the best deal?
By using an independent mortgage broker you will have access to thousands of different schemes and rates.
What does LTV mean?
LTV is loan to value. It is the ratio, expressed as a percentage, of your mortgage when compared to the property value. Check out our LTV calculator.
What does APRC mean?
APRC stands for “Annual Percentage Rate of Charge” and it’s a way of showing the overall cost of your new mortgage.
How can a mortgage broker help me?
A broker can help you in a few different ways. They can search to find a great deal from those available. They will be able to look at how any fees affect the overall cost of a mortgage. And they can compare a remortgage to a product transfer to see which is more cost effective.
