At More Than Money we know that mortgages don’t have to be as confusing as the industry makes them out to be, which is why in this article I’m going to be talking about a type of mortgage you might have heard of: fixed-rate mortgages.
Mortgages; they’re not a one-size-fits-all type of thing, and if you don’t happen to be a mortgage expert, all of the different types of mortgage loan and how they work can be a little confusing.
What happens when the ‘fixed’ part ends? And is a fixed-rate mortgage right for you?
Let’s dive straight in!
What Is A Fixed-Rate Mortgage?
A mortgage is a loan you take out in order to buy a property or piece of land.
As with any loan, you have to pay interest.
With a fixed-rate mortgage, that rate of interest is guaranteed to stay the same for a set period of time.
The reason this is so appealing is that you’ll know exactly how much you have to pay each month during that period, which makes fixed-rate mortgages the most popular type of mortgage available.
How Long Is The Rate Of Interest Fixed For With A Fixed-Rate Mortgage?
You can fix the amount of interest you pay on a fixed-rate mortgage for a period of two, three, five, seven, or ten years.
Put simply, the longer your fixed-rate period is, the higher the rate of interest you’re going to pay.
If you think about it, this makes sense – mortgage lenders are many things, but psychic isn’t one of them, and it’s harder for them to predict what’s going to happen in the housing market over a longer period of time.
In effect, you’re paying for the peace of mind that comes with knowing whatever happens during the fixed-rate period, you won’t be paying any more (or less!).
How Long Should I Fix My Fixed-Rate Mortgage For?
Most fixed-rate mortgages are set for either two or five years.
If you think it’s likely you’ll move in the near future, or that you might want to switch mortgage deals before too long, a two year fix is the best choice because it gives you more freedom.
A five year fixed deal obviously means that the interest you pay will remain the same for longer, but is slightly more expensive. You just need to think about whether you want to commit to a deal for that long.
You might be wondering why – after all, locking into a low rate of interest for five years sounds pretty awesome.
However, if you’re in a fixed period and decide you want to move house or remortgage, you’re very likely to have to pay an early repayment charge (ERC) – which can be very expensive.
What Is An Early Repayment Charge?
An ERC is a percentage of the outstanding balance of your mortgage.
On a five year fixed rate mortgage, you’re going to be looking at around a minimum of 5% of the balance if you want to get out of it during the first year, reducing by 1% each year after that.
If you think it’s likely that you might want to move house within five years, either go for a shorter fixed-term period, or find a mortgage with low (or no!) ERC.
As always, I recommend speaking to a qualified mortgage broker before deciding on which type of mortgage is right for you – so if you’re considering a fixed-rate mortgage right now, and you’re not sure about fixed-rate periods – give us a call!
What Other Fees And Charges Are Applicable When It Comes To Fixed-Rate Mortgages?
Fixed-rate mortgages aren’t all sunshine and rainbows, even if you don’t plan on remortgaging or moving any time soon.
There are still upfront fees and overpayment charges to consider…
Fixed-Rate Mortgage Upfront Fees
Yes, if you want a fixed-rate mortgage, you’re going to be charged an upfront fee.
This might also be called a product fee, completion fee or arrangement fee – it all depends on the lender.
Research carried out by Moneyfacts at the tail end of 2020, showed that on average, the upfront fee on a fixed-rate mortgage is the highest it’s been since 2012 – around £1,078.
If you’re feeling flush, most fixed-rate mortgages will let you overpay up to 10% of the balance every year.
You can either make regular overpayments, or just as and when you like on an ad-hoc basis.
Is A Fixed-Rate Mortgage More Expensive Than A Variable-Rate Mortgage?
Historically, yes, that’s always been the case – but times are a-changin.
Fixed-rate mortgages are so popular now that they’ve become a lot more competitively priced.
For example, if you happen to have a big deposit you can get a super-low rate of not much more than 1% interest on a two year fixed-rate mortgage.
Another boost for fixed-rate mortgages was the COVID-19 outbreak.
Bear with me.
You see, a variable-rate mortgage is one where your repayments can go up and down depending on the Bank of England base rate.
The cut to the base rate that occurred in the wake of the pandemic saw a lot of the best variable-rate mortgage deals being taken off the market – hence fixed-rate mortgages becoming a more attractive option.
What Happens To My Fixed-Rate Mortgage Once My Fixed Period Ends?
Ok, so let’s say you have taken out a fixed-rate mortgage, with a fixed-rate period of two years.
What happens once that two years is up?
When your fixed-rate period ends, your lender will transfer you onto a standard variable rate mortgage (SVR).
This SVR is set by the individual lender and the amount can change at any time.
This means that your repayments on an SVR mortgage could be a lot more expensive.
For example, according to Moneyfacts, in November of 2020 the average interest rate on a fixed-rate mortgage over a period of two years was 2.53%
However, the average SVR was 4.44%
That’s quite a hike.
So, how do you avoid that?
Before you get transferred to your lender’s SVR you need to remortgage to a new deal. That can either be with your current lender, or with someone new.
Luckily, you don’t have to wait until the last minute. You can arrange a new deal up to six months before your fixed-rate period ends.
Whether you’re looking at mortgages for the first time, or are looking to remortgage before your fixed-rate ends – or for whatever reason – More Than Money can help.
We offer clear, jargon-free advice that makes sense, and pride ourselves on being able to find the best mortgage deal for you. So drop us a message, give us a call, or pop in for a cuppa and chat, and let’s see what we can do!