What is a fixed-rate mortgage?
A fixed-rate mortgage is a mortgage where the interest rate remains the same for a set period. The three most common deals available are two, three and five-year fixed rates, although other terms are available. Some providers will allow you to fix it for as long as 10 years.
A fixed-rate may be suitable for you if you like the idea of having certainty for a set period of time, they offer peace of mind knowing your monthly payments won’t change for the fixed rate period.
They will generally have early redemption penalties (ERCs) if you repay some or all the mortgage early, although most fixed-rate deals offer a 10% annual overpayment allowance without penalty.
How long should you fix your mortgage deal for?
This will depend on your own circumstances, and there are several considerations.
Longer term fixed rate deals will protect you from potential interest rate rises, however, if interest rates fall, you will be tied to a higher rate for a lengthier period.
Longer-term deals offer peace of mind, however, are less flexible than shorter-term ones. If you are planning on moving, re-mortgaging or overpaying significantly in the near future, a shorter term may be worth considering.
Interest rates at the time of writing (18/02/2023) have recently risen significantly over the past 6 months, they are however currently decreasing. Fixing in for a long period of time at present could mean that if interest rates continue to fall, you end up paying more overall in the long run compared to choosing a shorter term, that said, there’s no guarantee rates will continue to fall.
Until recently, interest rates were at an all-time low, and the base rate was 0.1%. Securing a deal long-term fixed rate whilst rates are low and can only is certainly worth considering.
Can I move home with a fixed-rate mortgage?
Most fixed mortgage deals are ‘portable‘ which is a mortgage term for transferring your mortgage to another property.
Even if your lender allows, there’s no guarantee your lender will allow you to port because your application will be subject to the lender’s affordability and criteria at the time of application.
Assuming you can port your mortgage, you may be able to borrow more than you currently owe, subject to the lender’s affordability model. If you port your mortgage onto a new property you will likely avoid early redemption penalties as long as you aren’t reducing the mortgage balance.
What happens when my fixed-rate mortgage ends?
If you’ve not arranged to remortgage, you will revert to the lender’s standard variable rate (SVR) at the end of the fixed rate period.
The SVR is the default rate you revert to after the initial fixed period, the SVR is usually substantially higher than the fixed rate.
Your mortgage provider will write to notify you in advance of your deal coming to an end. To avoid going onto the lender’s SVR, it’s worth exploring your re-mortgage options 3-6 months prior to your fixed rate ending.
What happens if I repay my fixed-rate mortgage early?
Fixed-rate mortgages will generally have early redemption charges (ERCs) for repaying the mortgage early. ERCs will apply if you are redeeming the mortgage through the sale of the property, re-mortgaging to another provider or repaying from savings. If you’re eligible to port your mortgage onto a new property, you may avoid some or all the ERC.
Early repayment charges are designed to discourage early repayment, the lenders set their rates based on the customer borrowing over the full fixed rate period and therefore, early repayment would not make them commercially viable if repaid early without penalty.
The size of the exit fee is usually a fixed percentage of the borrowing amount. Longer-term fixed rates typically have higher ERCs, they can either be a fixed amount throughout the term or can be tapered, for example, a certain % in the first year and a lower % for the following year.
For example, a 5-year fixed rate may have a set ERC of around 3-5% of the balance. Alternatively, they may be tapered, for example, 5% in year one, 4% in year two and 3/2/1% in the final years.
The exit fees can be considerable, especially on larger loans and highlight the need to think carefully about future plans when choosing a fixed-rate mortgage.
What is a variable-rate mortgage?
A variable-rate mortgage is one where the interest rates and monthly payments are not fixed and can fluctuate.
They may initially be lower than fixed rates but can increase if interest rates go up. There are usually three types of variable mortgages, trackers, standard variable & discounted variable rates.
What is a standard variable rate?
A standard variable rate (SVR) is the default rate you revert to after the initial fixed period, is is usually substantially higher than the fixed rates and therefore, your monthly mortgage payments will increase.
What is a tracker-rate Mortgage?
A tracker mortgage is a mortgage product where the interest tracks in line with a base rate, usually the Bank of England Base rate.
They usually track a certain percentage slightly above the base rate. For example, they may be the Bank of England base rate + 1%. They are usually slightly cheaper than fixed-rate mortgages initially, although your monthly payments can go up or down.
Tracker mortgages are more flexible than fixed-rate mortgages and often have no ERCs or significantly lower ones compared to fixed-rate products.
They may be suitable if you’re thinking about repaying a large chunk of your mortgage in the near future or selling the property, and having flexibility is important.
They also offer the opportunity to save money if interest rates fall, however you will need to ensure you have budgeted for potential increases in your monthly payments.
What is a discounted rate mortgage?
A discount variable rate is an interest rate that is set at a discount below the lender’s standard variable rate.
How long can I get a tracker deal for?
They are typically available over periods of 1-5 years, some providers offer lifetime trackers which offer the same terms throughout the entirety of your mortgage.
What is the Bank of England base rate?
The bank rate, otherwise known as the Bank of England base rate, is the rate of the BOE charges banks and financial institutions to borrow money.
The MPC meet eight times a year to discuss and set the rate.
What impact does the BOE have on interest rates?
The base rate will have a direct impact on your mortgage monthly payments, if you’re fixed, you’re mortgage payments will remain unchanged until your current fixed rate deal ends.
If you’re on a tracker mortgage, your rate will immediately increase or decrease. The base rate has a direct impact on trackers, which track in line with the base rate, fixed rates are influenced by the base rate, but other factors are involved.
What mortgage repayment types are there?
Mortgages can be arranged on either a capital repayment or an interest basis.
Capital repayment
A capital repayment mortgage will ensure that your mortgage will be repaid at the end of the mortgage term, so long as the monthly payments have been made on time.
They provide certainty and peace of mind knowing you will own your home entirely at the end of the term.
Interest- only
Interest-only mortgages require you to service only the interest element of the mortgage, and the borrowing amount will remain unchanged throughout the term unless you overpay.
The monthly payments on interest-only mortgages are lower than capital repayment mortgages. You will usually need a plan to repay the mortgage at the end of the term, for example selling another property or investments. Interest-only mortgages usually require a minimum 25% deposit.
How can Strive Mortgages help?
The mortgage market presents you with quite literally thousands of options; choosing the best deal to suit your requirements can be a daunting process, especially if you’ve not done it before.
Having an experienced broker like Strive Mortgages on hand will ensure you understand the options available to you and ensure you make the right choice. Get in touch with us today, we can help save you time, stress and money.
