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An Introduction to Fixed Rate mortgages
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By Becca Talbot
becca.talbot@consumerchoices.co.uk
With more than a million homeowners’ mortgage deals due to expire within the next twelve months, the question they are all being faced with is whether to switch to a Fixed Rate mortgage or not.
As no one can ever be sure too what’s going to happen with interest rates, it’s often difficult to know which mortgage type will suit you best. The Bank of England has imposed five increases over the past financial year and many commentators expect at least one more jump before the year is over, meaning taking out a Fixed Rate mortgage now could be a wise move by any borrower.
Our guide introduces you to Fixed Rate mortgages, explaining how a fixed rate deal works, what the advantages and disadvantages are, and offers advice on helping you choose the right option for you and your home.
What is a Fixed Rate mortgage?
A Fixed Rate mortgage has a fixed interest rate for a set amount of time (for example two, five or ten years), meaning the repayments you make back on your loan will be the same from month to month, until the deal ends.
According to the Council of Mortgage lenders, Fixed Rate mortgages account for seventy per cent of all mortgages taken out in Britain, with two-year Fixed Rate deals being the most popular mortgage type with British homeowners. More and more borrowers, however, are turning to longer term fixed rates of five or ten years, taking advantage of the the lower monthly repayments.
Perfect for anyone that wants to know exactly what they’ll be spending on repayments each month, Fixed Rate mortgages are often the choice of first time buyers who are on limited budgets, or for young families who have to monitor their finances carefully.
There are three things to consider before opting for a Fixed Rate deal:
- Length – You’ll need to think about the length of mortgage that will suit you best, and compare it against those on the market. Use your own judgement as to how long to go for – if it’s a particularly cheap deal you may want to jump on it, and choose a five year deal, or maybe longer. But if you think interest rates may drop in the next few years, you might want to go for a shorter, two-year Fixed Rate mortgage deal.
- Redemption Penalties – Before leaving your current deal, you will need to check to see if there are any redemption penalties or exit fees tying you to it. Generally, when you’re with a special rate mortgage deal, there are penalties if you leave before the special rate deal is over. This is usually a percentage of the outstanding repayments, so could equate to thousands of pounds.
- Mortgage Fees – Similarly with exit fees, there can often be switching fees. Lately these have been creeping up, in an attempt by providers to claw back some of the money homeowners are saving by switching mortgages. Normally, the smaller the mortgage, the more impact the fees will have on what you can save.
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The advantages of a Fixed Rate mortgage
If you are someone who likes the security of knowing your repayments won’t change, or if you have stretched yourself into trying to buy a property, then a Fixed Rate mortgage is probably the right kind for you. Fixed Rate deals have several advantages:
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"If you are someone who likes the security of knowing your repayments won’t change then a Fixed Rate mortgage is right for you..."
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- You will know exactly what you’ll be paying from month to month and can budget accordingly.
- Knowing there are no nasty surprises around the corner will help you sleep at night, even when you read about rates sky-rocketing.
- If interest rates look a little shaky, and you predict that they are going to rise in the near future, fixing your mortgage rate could save you money.
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The disadvantages of a Fixed Rate mortgage
As with any mortgage, there are always downsides to taking out a new deal. Fixed Rate mortgages are no exception. We’ve listed a few of them here:
- If you take out a succession of short Fixed Rate mortgages, you can only switch between deals without accruing any penalties when the current one has finished which may not be when the best deals happen to be on the market.
- There could be heavy penalties to pay if you pull out of your agreement early, if for example, you have a financial windfall and you want to pay off the rest of your outstanding loan.
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Choosing a Fixed Rate mortgage
When opting for a Fixed Rate mortgage, you will need to decide just how long you want the mortgage term to last, and weigh up all the costs to find out whether you’ll be able to afford the monthly repayments.
Case Study:
Sandra and Tom are first time buyers, looking to take out a Fixed Rate mortgage on a house costing £218,112 (the average price of a house in the UK, BBC News). They can choose a two-year, a five-year or a ten-year fixed rate deal.
CreditChoices.co.uk has done the maths and selected three of the best mortgages for them:
| Provider |
Loan amount |
Length of fixed rate* |
Interest AER % |
Initial setup fees |
Monthly repayments |
| HSBC Mortgage |
90% of value of property = £196,300.80 |
2 years |
6.74% |
£799 |
£1,371 |
| Halifax |
75% of value of property = £163,584 |
5 years |
6.28% |
£995 |
£1,142.50 |
| Woolwich |
60% of value of property = £130,867.20 |
10 years |
5.94% |
£995 |
£848.25 |
* assumes that the couple are choosing a 25 year mortgage.
Sandra and Tom will need to do their own sums to work out what they can afford in monthly repayments, how much of their house they can afford to pay off now, and decide how long they want their fixed term for. Then they must choose that best suits their financial situation.
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The alternatives
If you feel that a Fixed Rate mortgage is not right for you, your financial situation or your home, there are several alternatives that you could consider.
If you are pessimistic that the base rate is going to remain stable or fall, then it may be wise to switch to a Base Rate Tracker mortgage. This type of mortgage follows the Bank of England’s base rate and will fluctuate accordingly. However, if you take out a loan of this kind, if the base rate does start to rise you may end up paying more than someone on a Fixed Rate deal.
Coming to the end of a Fixed Rate mortgage
If you are coming to the end of a two-year Fixed Rate deal that you were either lucky enough, or clever enough to take out during a time when interest rates were much lower than they are now, going on to another Fixed Rate will come as a hefty blow. A deal that originally carried a rate of 4.25% will now cost you about 5.75% in interest, meaning your repayments will be a lot higher, and the chances are you probably haven’t had a big enough promotion in two years to be able to cover the costs.
In this situation, it may be wise to move to a Flexible Rate mortgage, where your repayments can be altered to suit your situation. Flexible Rate mortgages, sometimes called variable mortgages, have been developed to cope with changes that could occur in a borrower’s financial circumstances (for example, job loss or promotion). Repayments are made over 10 months instead of 12, and there aren’t normally any charges for making overpayments or lump sum payments.
If you’re coming to the end of a ten-year or five-year Fixed Rate mortgage you wont really see a change in your repayments, as interest rates are roughly back to where there were when your loan was taken out. Changing to a provider’s SVR may see them rise though, so consider all you options before applying to remortgage.
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Our Recommendations
Chris Eagle, Commercial Manager at CreditChoices.co.uk, reminds homeowners to, as with any mortgage, look at all aspects of the deal before taking it out.
“With a Fixed Rate mortgage there is always the danger that the Bank of England’s base rate could drop, and you’ll be tied to your providers rate, meaning you’ll be paying more than if you were on a Base Rate Tracker mortgage or SVR. However, Fixed Rate mortgages can also work in your favour – if the base rate rises you won’t have to cough up the extra money each month to be able to afford your monthly repayments.”
“If you take out a Fixed Rate deal for a longer period, maybe five or ten years, then check that your loan is portable and can be carried with you if you decide to move house. And remember that any extra borrowing you make against your house will have to be with the same provider.”
Chris also advises you seek professional help before securing your mortgage deal: “Whilst a broker cannot predict the financial future, they can give informed, expert opinion on the current market and help you look at the bigger picture when making that all important decision”
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