A fixed rate mortgage is when your interest rate is stabilised for a set period of time. This can be beneficial in the sense of knowing exactly how much needs to be repaid each month.
Mortgage rates can be fixed for one, two, three, five, seven, ten and 15 years. 1 year and 15 year fixes are amongst the rarer types to be taken out.
Generally, the longer the fixed-rate period, the higher the interest rate. The reason for this being that it is more difficult for a lender to predict what will happen in the market during a longer period of time – fundamentally you will be paying for the certainty of knowing that your rate will not go up no matter what happens.
The table below depicts the availability of fixed-rate deals and their average interest rates as of November 2020.
|Fixed Period||Average Interest Rate||Number of deals|
Most fixed-rate mortgages are two-year or five-year deals.
Two-year fixes provide the greatest flexibility. They are most suitable for borrowers who wish to actively manager their mortgage and also routinely switch their deal. Two-year deals also suit borrowers who wish to move sometime in the near future.
Five-year fixes will protect your mortgage longer however, they are slightly more expensive. It is important to note, is it worth committing to a deal for such a long period of time – especially if you need to pay off your mortgage. If this is the case, then you will incur a penalty charge. Hence why it is imperative that you speak to a mortgage broker to ascertain how long to fix your mortgage for.
In addition to the term and interest rates, the upfront fees, ERC’s and the option of making overpayments should be taken into account.
Fixed-rate mortgage typically come with an upfront fee – these are usually referred to as an arrangement, product or completion fee. ERC’s are early repayment charges which are charged as a percentage of the outstanding balance. ERC’s on five-year fixes often start at around 5% of the balance during the first year and then reducing by 1% each year.
Most fixed-rate mortgages will allow you to overpay up to 10% of the balance every year, either in regular payments or on an ad hoc basis. If this limit is exceeded then an ERC charge may apply.
When the fixed-rate period comes to an end, your lender will transfer your mortgage onto a standard variable rate (SVR) – every lender will set their own SVR and this can change at any time. For this reason, it is important to renew your mortgage in time to avoid being on the SVR.
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