Whether you’re applying for a mortgage for the first time, or remortgaging, one of the decisions you’ll have to make is whether to choose a fixed mortgage or a variable-rate mortgage.
To help you make your decision, here’s our guide to fixed rate mortgages, including the pros and cons of a fixed mortgage, and the other options you can consider.
What is a fixed-rate mortgage?
A fixed-rate mortgage is when your mortgage repayments are fixed for a certain amount of time. Usually, this will be for 2 or 5 years but it can also be longer. A fixed rate mortgage means that the interest rate is ‘fixed’ for the term that you have taken the mortgage out for, so your monthly repayments will be the same fixed cost for the entire term of your mortgage.
During your mortgage term, you’ll know exactly how much you’re paying each month and your lender can’t unexpectedly charge you more or less.
Once the term of your mortgage is up, you can look to remortgage by switching to another fixed rate mortgage for the next period of time (2 years, 5 years, etc).
Many homeowners enjoy the security of knowing exactly how much their mortgage repayments will be each month, and there are more fixed-rate mortgages available than any other type of deal. However, there are alternatives to fixed rate mortgages which you may wish to consider. We’ll take a look at the other options now…
What are the alternatives to fixed-rate mortgages?
Anything that’s not a fixed-rate mortgage is known as a variable-rate mortgage. This means that your repayments are ‘variable’, so instead of paying the same amount every month, your repayments could go up or down in line with what the Bank of England’s interest rates are doing.
Standard variable-rate mortgages (SVR)
If you have previously been on a fixed rate mortgage and your mortgage term has come to an end without you remortgaging, your mortgage lender will automatically move you onto a standard variable-rate mortgage.
If you’re on an SVR, it means your lender can change your mortgage repayments whenever they want to, either up or down. Usually, your repayments will move in line with whatever the Bank of England’s interest rates are doing, so if interest rates go down, your repayments will likely go down. And if interest rates go up, your repayments probably will too. However, it’s worth noting that with a SVR your lender doesn’t have to move in line with the Bank of England interest rates: they can choose to change your repayments whenever they wish, to whatever they like.
The pros of a SVR are that you may benefit from drops in interest rate, but of course on the other side of the coin, the risk is that interest rates may go up, in which case you might have an unpleasant surprise when your monthly repayments increase.
However, a benefit of a SVR is that there aren’t any early repayment charges. If you’re on a fixed rate mortgage and you want to leave early, you’ll usually have to pay a high fee in order to get out. An SVR allows you to pay some, or all, of your mortgage back early if you should want to.
Tracker mortgages
Similar to a standard variable-rate mortgage, a tracker mortgage can also go up or down. But the big difference is that your lender’s not allowed to move the rate around whenever they feel like it: they can’t just decide to put your repayments up or down like they can with a SVR. Instead, any changes to your repayments have to follow the Bank of England’s official borrowing rate.
The good thing about this is you are a little more informed of how changes could affect your repayments. If the Bank of England’s rate goes down, you know your repayments will go down too. And if the Bank of England’s rate goes up, so will your repayments.
Also unlike SVR mortgages, most tracker mortgages will lock you into an agreement for a set number of years just like a fixed-rate mortgage would. That means that you are likely to face a repayment charge if you choose to get out of your mortgage deal early.
Should I choose a fixed rate mortgage?
Many homeowners choose a fixed rate mortgage. It is the only one that gives you the peace of mind of knowing exactly how much you’re going to be repaying each month.
However, it’s worth weighing up all the pros and cons of your mortgage options before you make your decision:
Pros of fixed rate mortgages:
- You know exactly how much you’re going to have to pay each month which helps with budget planning.
- No nasty surprises when it comes to your repayments each month: you won’t be affected by any interest changes, or by your lender deciding to increase or decrease your monthly repayments.
- If you take out a fixed-rate mortgage at a time where interest rates are low, your lender won’t be able to put your rates up when interest rates rise again.
Cons of a fixed rate mortgage:
- If the interest rate drops, you may end up paying higher rates than customers on some of the variable rate products, who would be likely to benefit from this drop in rates.
- If you want to leave early, you’ll face early repayment charges which can be high. So, if you’re planning on selling your house soon, it might not be right for you.
How a mortgage broker can help?
Taking out a mortgage is always a big decision, and there are lots of questions you’ll need to ask to ensure you get the best deal for you. This is where an independent mortgage broker can help.
TaylorMade are professional independent mortgage experts and can offer friendly, helpful advice on which type of mortgage deal would be the best for your circumstances, as well as offering today’s best mortgage rates.
