For how long should I fix my mortgage? | moneyfacts.co.uk

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Published: 16/02/2022

Fixed rate mortgages are typically the first port of call for borrowers, offering rate certainty and set repayments that can make the process of homeownership more streamlined and potentially cheaper, too. But the question is, for how long should you fix your mortgage? This guide will discuss your options in more detail.

What does fixed term mortgage mean?

A fixed term mortgage refers to a mortgage deal where the interest rate is fixed for a set number of years, known as the initial term. The rate will remain unchanged throughout that term and so, too, will the monthly repayments, allowing borrowers to budget effectively as they’ll know exactly what their mortgage outgoings will be.

How does a fixed rate mortgage work?

Given that fixed rate mortgages are exactly as they sound – mortgages with a fixed interest rate – it’s a very simple process. You choose the initial term that’s right for you and can shop around for the best mortgage rates to suit, and your lender will tell you the repayments you’ll be expected to make throughout the initial term.

 

Crucially, the rate and your subsequent repayments won’t change, no matter what happens to interest rates at large. This means if the Bank of England were to increase base rate during the fixed term of your mortgage, your rate wouldn’t be impacted (though likewise, if base rate were to be lowered, your rate wouldn’t drop in kind).

For how long can you get a fixed rate mortgage?

Initial terms typically range from two to 10 years. Two-year mortgages are the most common, but you can also get three-year fixed rate mortgages, five-year deals and even 10-year options, allowing you to fix your rate and your repayments for a decade.

 

It’s important to note that this only comprises the initial term of your mortgage. Standard mortgage terms can be as long as 30 years or more, with only the first few years being fixed (though you can still remortgage and bring the overall term down, as is the case with all mortgage deals).

Should I fix for two, three, five or 10 years?

Knowing which option to go for isn’t always an easy decision, and a lot of it comes down to rate. Two-year fixed mortgages are traditionally the go-to offering and usually offer the best mortgage rates, though the uncertainty of recent years means some borrowers may like to seek longer-term deals instead. Three, five and 10-year mortgages offer longer repayment certainty, but given that longer terms typically result in higher mortgage rates, they’re usually more expensive.

 

There’s risk on either side of the scale. Opt for a two-year deal and, if interest rates have risen substantially in that time, you’ll be faced with far higher repayments after a relatively short period. If you’d taken out a longer-term deal instead, you’d be protected against those higher repayments for much longer. However, if the opposite were to happen and interest rates fell, you’d be able to benefit far more quickly if you were on a two-year deal, whereas those tied in for 10 years could end up paying far more in interest than they’d otherwise have to.

 

Some borrowers may like to go for the middle ground, with three or five-year deals offering a good compromise between being protected from interest rate rises and not being locked in for too long should rates go down. Ultimately, it’s all about balancing the risks, and factoring in your circumstances, preferences and budget to decide which term would be best for you. This is also where the expertise of a broker can be invaluable, as they’ll be able to discuss the options in more detail and help you decide on the mortgage that’s perfect for your needs.

Should I speak to a mortgage broker?

Mortgage brokers remove a lot of the paperwork and hassle of getting a mortgage, as well as helping you access exclusive products and rates that aren’t available to the public. Mortgage brokers are regulated by the Financial Conduct Authority (FCA) and are required to pass specific qualifications before they can give you advice.

 

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What are the advantages of a fixed rate mortgage?

  • You know exactly what your repayments are going to be for the initial term. This can be particularly helpful when it comes to budgeting, as there’ll be no nasty surprises during the fixed period.
  • Your mortgage rate won’t change even if interest rates start to rise, which can offer peace of mind during times of rate uncertainty.
  • They’re easy to understand and offered by most lenders, with an excellent range of products meaning it’s easy to find a deal that’s right for you.

What are the disadvantages of a fixed rate mortgage?

  • They can be inflexible, and if you want to repay the loan early, you could be hit with a substantial early repayment charge (ERC).
  • While it’s possible to overpay, there are restrictions on how much extra you can pay off each year (typically 10% of the balance).
  • If interest rates fall, you won’t be able to take advantage of them, which means you could end up paying over the odds. This risk may be starker for those who have chosen a longer term deal.
  • Rates can be higher than on variable mortgage deals.

Can you get out of a fixed rate mortgage early?

Yes, though as mentioned above, you’ll have to pay hefty fees for the privilege. ERCs are tied to the mortgage term and are normally a percentage of the outstanding balance, which can sometimes reduce as the years progress (for example, you could face a 5% charge if you’re in the first year of a five-year fix, reducing to 1% if you’re in the final year).

 

Given the potential costs involved, it’s important to weigh up the benefits of getting out of the loan early, as even if you could remortgage to a cheaper deal elsewhere, the fees involved could cancel out any saving.

What happens when your fixed rate ends?

Once your initial term has come to an end, you’re generally left with two options: do nothing and let the mortgage revert to the lender’s standard variable rate (SVR), or remortgage to a new deal. For most borrowers, the second option will be preferable, but let’s take a look at what’s involved with each.

1. Revert to the lender’s SVR

The lender’s SVR will almost always be higher than both your initial fixed rate and the current deals on offer. This means your repayments could instantly increase, and because the rate is variable, it can change at any time – any fluctuations are often tied to the Bank of England base rate, but this isn’t the only factor involved, and lenders are under no obligation to explain the changes they make. This not only means you could be left with a very expensive mortgage, but it can also make budgeting far more difficult, as there’s no way of knowing what the interest rate (and therefore your repayments) will be from one month to the next. This is why most borrowers coming to the end of a fixed rate tend to remortgage before they’re automatically moved onto an SVR.

2.Remortgage to a new deal

When remortgaging, you can either stick with your current mortgage provider or shop around to see if you can find a better deal. It’s always good to see what’s out there, but make sure to speak to your current provider as well – they may be able to offer preferential rates to current borrowers, and may not ask for as many fees either. Speaking of fees, you can expect to pay a few when you remortgage, including arrangement and booking fees, and valuation costs and conveyancing fees if you move to another provider. However, many remortgage deals will cover these charges as an incentive, which is why it could pay to do your research – and even with fees involved, it could still pale in comparison to the cost of being switched to a lender’s SVR. Make sure to start comparing mortgage rates well ahead of your initial term coming to an end to find the best deal for your needs.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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