Everything you need to know about fixed rate mortgages
Most people who have had a mortgage will have either had a fixed rate mortgage at some stage or will certainly have heard about it.
It’s certainly a common term for anyone that has a mortgage and it is without doubt the most popular type of mortgage. Most mortgage lenders in the UK offer a comprehensive range of different types of mortgages, including the top two which are fixed rates and discount rates.
Fixed rates can be a great way to help you to budget your monthly outgoings because your mortgage repayments won’t change during your fixed rate period.
History of fixed rate mortgages
Amazingly, fixed rate mortgages have only been around since 1989 where they were first introduced to the UK lending market. It wasn’t until the mid-90’s where they became more popular among borrowers and homeowners.
What is a fixed rate mortgage?
A fixed rate mortgage gets its name from the period at the beginning of the mortgage term, where the interest rate is fixed (does not change).
Most mortgage lenders will offer fixed rate mortgage deals to its new and existing customers. These deals deals will be set by each lender based on the lenders capacity and the current Bank of England Base Rate (BBR).
Fixed rate mortgage deals will be set based on the following:
- Loan to Value (LTV) *higher LTV mortgages will usually have higher rates
- Bank of England Base Rate (BBR)
- Length of fixed rate period *longer fixed rates are often higher
- Rate of inflation
- Credit history *lower credit scores will usually pay higher rates
- Current appetite to lend
Fixed rates on these types of mortgages will usually last for 2 to 5 years for most borrowers, but there are longer deals for up to as much as 40 years. Very short term fixed rates such as 1 year or very long term fixed rates such as 40 years are far more specialist and rare.
Can I have a fixed rate mortgage?
Most borrowers will be offered a mix of fixed rate mortgage deals and variable rate (including discount or tracker mortgage) deals.
You should in most instances be able to get a fixed rate mortgage when you’re buying a property or remortgaging. The main thing is to make sure that a fixed rate mortgage is right for you and good value.
There are very few occasions where you might not be able to get a fixed rate mortgage. Some of these might be:
- Periods of economic uncertainty (e.g. recession)
- Bad credit mortgages
- Specialist mortgages
- Second charges
- Non-standard construction properties or self-build
- Bridging finance
When is a good time to fix your mortgage deal?
There are a few occasions where you might want to think about taking a fixed rate mortgage instead of a variable rate.
Here are the most common times where borrowers should consider a fixed rate:
- First time buyers (FTB’s) are often stretched financially and would not be used to having a financial commitment this large, and the costs of owning a home.
- Lower Loan to Value (LTV) mortgages will usually offer lower fixed interest rates so can be good value.
- Affordability is tight so you need some security and certainty for the monthly repayments on your mortgage to help you to budget.
- Increasing interest rates can have a significant impact on your mortgage repayments so fixing can save you thousands potentially.
You should get advice from a qualified mortgage expert who can guide you in what options are best for you.
Is now a good time to fix your mortgage?
2022 was a very strange year for interest rates with several consecutive increases by the Bank of England’s Monetary Policy Committee (MPC).
Interest rates have increased significantly from 0.25% in December 2021 to 3.5% in December 2022. Interest rates have been below 1% since February 2009 so borrowers have been used to lower mortgage rates for nearly 15 years.
Fixed rate mortgages are now being offered at levels of around 5% or 6% depending on your circumstances. Most of the current economic forecasts suggest that the Bank of England Base Rate might settle at around 4% for a period of time, meaning that fixing your mortgage can secure your interest rate.
There’s still no certainty that interest rates will settle at 4% and may well go higher than that, depending on what happens to the UK economy.
Why should I take a short term fixed deal (2 to 5 years)?
Short-term fixed rate mortgage deals tend to range between fixed term deals of 2 years and 5 years. These are by far the most popular fixed rate mortgages and most borrowers will look for when applying for a new deal or remortgage.
The main reason for people taking a shorter term fixed rate deal is that it offers a level of flexibility for the borrower. Longer term deals will usually tie you in for a much longer period of time whereas shorter deals will mean less penalties.
Reasons why you might want to consider a short-term fixed rate mortgage:
- Lower Early Repayment Charges (charges tend to be lower overall)
- Less time tied in to your mortgage with penalties
- Rates can be lower
- More flexibility to move home or change deal (after fixed rate ends)
Why should I take a long term fixed rate deal (over 10 years)?
Long-term fixed rate mortgages (over 5 years) offer certainty over your mortgage repayments for 10, 15, or even up to 40 years. These in recent years have become more popular for borrowers while interest rates have remained low.
Borrowers now who took advantage of these unpresedented deals will generally be in a stronger position as they will be taking advantage of lower mortgage repayments. The invention of extremely long fixed rate mortgages was driven by the recent period of extremely low interest rates between 2009 and 2022.
Reasons for wanting a long term fixed rate mortgage:
- Certainty for budgeting over more years
- Protection against potential future interest rate rises
- Interest rates can be attractive
Can I change a fixed rate mortgage?
The simple answer is almost always, no. Once you’ve taken out a fixed rate mortgage deal then that would be the rate that you will be tied to.
You might be able to change to another deal with your existing lender by paying a charge or fee. There will almost always be some sort of penalty attached to making any changes to your mortgage during a special rate period.
Once your fixed rate has ended then you should be free to do whatever you want to your mortgage without a penalty.
Can I pay my fixed rate mortgage off early?
Almost all fixed rate mortgages will have an Early Repayment Charge (ERC) which means that you’ll have a penalty for paying some or all of your mortgage off before the end of the fixed rate period.
Most ERC’s will range from 2% to 5% of the remaining mortgage balance and will last for the full special rate period.
What happens if I want to move house during my fixed rate period?
The thing that you need to be looking for here is, does your mortgage have a ‘portability’ option or clause.
Porting your mortgage refers to when a mortgage can be moved or ported to a new property without a penalty. You should be able to move your existing deal with your current lender to a property that you are buying upon request.
If your mortgage is not portable then you might need to repay the mortgage and take out a new deal. This will often involve paying any penalty or ERC that you have with your existing mortgage deal, so you’ll need to factor that in to the costs of moving home.
Some things to think about if you want to move home during a fixed rate:
- Is your mortgage portable?
- Do you have any ERC’s to pay?
- Are you upsizing (need to borrow more)?
- Are you downsizing (borrowing less so need to repay some of your mortgage)?
- Will your current lender allow you to buy that particular property?
- Do you need to move within the fixed rate period?
If you’re upsizing, and you need to borrow more money, then your existing lender may allow you to top-up with an additional borrowing. This will leave your existing deal as it is and give you a second mortgage amount on a new deal.
Advantages and disadvantages of fixed rate mortgages
Advantages of fixed rate mortgages
- Best way to budget with such a significant amount of money (usually your largest outgoing)
- Protect yourself against future interest rises which can be extremely useful during periods of economic uncertainty
- Avoid paying the lenders Standard Variable Rate (SVR) which is often much higher
Disadvantages of fixed rate mortgages
- Generally the fixed rate deals will be higher initially than discounted variable rates
- Early Repayment Charges for paying off your mortgage within the fixed rate period
- If interest rates drop then you won’t get to see this on your mortgage
- Can be inflexible for people wanting to repay large chunks off your mortgage and charges will often apply
How to find the best fixed rate mortgages
There are loads of different options when considering getting a new mortgage or remortgaging your property. The best option is usually to speak to a qualified mortgage broker who knows the market and can point you in the right direction and give you some peace of mind.
Your chosen mortgage specialist should have access to a panel of mortgage lenders with a multitude of fixed rate deals.
Here are some of the main options for finding a fixed rate mortgage:
- Speak to a qualified mortgage specialist
- Online mortgages
- Apply for a fixed rate mortgage with your bank or building society
- Speak to an IFA