The pros and cons of a fixed-rate mortgage
By Jennifer Harrison, Content Lead
Taking out a mortgage comes with many choices, a key decision being how long you should fix your mortgage for. This blog will focus on fixed-rate mortgages, explaining what they are and discussing the pros and cons you should consider when asking yourself: ‘is a longer fixed-rate mortgage a good idea now?’
What is a fixed-rate mortgage?
A fixed-rate mortgage is a type of mortgage where, for a given period of time, for example, 2 or 5 years, the interest rate on your mortgage stays the same — regardless of what happens to interest rates in the wider market. As a result, your monthly mortgage repayments will remain unchanged for the duration of the fixed term. Most lenders offer fixed-rate mortgage terms ranging between two and five years, but you can find lenders who offer longer fixed-rate deals, up to the full mortgage term.
What happens when my fixed-rate mortgage approaches the end of the fixed period?
As you approach the end of the fixed-rate period, your lender will look to offer a new fixed rate. However, there is no guarantee as to where rates will be at that point in time, so you risk potentially paying more if rates have risen. If you don’t secure a new fixed-rate deal, you’ll be placed onto your lender's standard variable rate (SVR). This is susceptible to rate fluctuations, which may not always be the most cost-effective.
How long should I fix my mortgage for?
This is a difficult question and will depend on individual circumstances and requirements. A longer-term fix, such as five or ten years, will provide longer-term payment security, but may mean that if interest rates fall, you won’t be able to take advantage of lower interest rates. Equally, taking a shorter fixed-rate product, for example, a two-year fixed rate, may mean that you risk paying more for your mortgage later on if rates are higher when you need to refinance your loan. Much will depend on your appetite for risk, as a fixed rate can remove a lot of the uncertainty of variable monthly payments. The aim is also to try and ensure that over the life of the mortgage loan, total payments are minimised.
What are the pros and cons of a fixed-rate mortgage?
As with any mortgage product, there are both pros and cons; it’s important to remember that what’s right for you will inevitably be different from what’s right for someone else. Speaking to a mortgage advisor will help you compare the advantages between different fixed rates, helping you decide what’s most suited to your circumstances.
Advantages of fixed-rate mortgages can include:
Predictability and consistency
The key advantage of having a fixed mortgage rate is that you will know exactly what you’re going to be paying each month for a set length of time and can budget your finances accordingly.
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Protection from rate increases
If interest rates rise across the wider market, you will not be negatively impacted. Your interest rates are locked and protected for the duration of your deal, so your monthly payments will remain the same.
Disadvantages of fixed-rate mortgages can include:
Early repayment charges
With a fixed-rate mortgage, you’re committing to the full length of the term, and exiting the deal early can mean facing heavy fees. This is particularly important to consider if you’re thinking about moving home before your fixed-rate deal expires.
Restrictions on overpayments
Though this drawback is not exclusive to fixed-rate mortgages, normally, there will be limitations regarding how much you can overpay. For example, overpayments above 10% will generally result in a penalty.
You won’t benefit if interest rates fall
If interest rates come down during your fixed-rate term, you won’t feel the benefit of lower rates, and therefore lower payments, as yours are fixed.
Should I consider a fixed-rate mortgage?
There is no correct answer to this question; it will vary depending on your circumstances. Whether you’re planning a house move in the short term, have little disposable income each month, meaning you need the stability of being able to budget, or have a job where you earn lump sums of money and want to make large overpayments without facing penalties, there are many factors that might sway your decision on how long to fix for — or whether to fix at all.
Again, a mortgage advisor will be available to help with this sort of decision and guide you through the application process once you have found a deal that’s right for you.
All information contained in this blog is for general information use only. It does not provide mortgage advice and should not be construed as being mortgage advice, which can be provided by your mortgage broker and advisor only.
Mortgage and Protection Adviser at Village Financial Solutions Ltd
7moIt’s a tricky one for mortgage advisers at the moment as to fix for five is invariably cheaper, but traps the client in the medium term when rates are much more likely to drop than rise. However, in many cases the client can borrow more if they fix for longer and this is often the reason I will opt for this. Fixing for two could mean that the client is paying more in the short term, but do we know that rates will be significantly lower when they come to fix again in two years? They may have to fix on a similar rates to the current five year rates, and pay more in lender and advice fees. I think it’s safe to say, if the client can afford the mortgage repayment and won’t be too concerned if rates come down whilst they are fixed, then there’s no reason why you shouldn’t fix them for either 2 or 5 years. In respect to trackers etc, these would be great if you could borrow what the client needs to cover affordability, are happy that the client will pay more in interest, are happy that the client can cope in the unlikely event that rates do rise and can find a product with no ERC as many will levy these.
Cofounder | Executive Chairman | Pathway
7mo🌎 Imagine a world where you can buy with no deposit 🌍 in this strange land you could start your buying journey in your early twenties when your friends are thinking about saving up to make a down payment years and years later 🌎 as you move into your thirties and into your peak earning years the fixed rate loan you took out years ago seems more affordable than it used to 🌍 This is the sort of real world product the banks should think deeply about as it’s easier to explain than all the speculation about short term rates rising and falling #fintechinnovation begins at home 🏠