Fixed-rate mortgages offer the security of knowing exactly what you’ll pay each month but you’ll probably pay a premium for that luxury.
Find out if a fixed-rate mortgage is for you with this guide.
A fixed-rate is simply a mortgage where the interest rate stays the same for a set period, usually between two and five years. They offer static payments and protection from interest rate rises, but are slightly more expensive than variable rate mortgages.
If you are on a tight budget and/or don’t want to worry about the threat of rising interest rates a fixed-rate mortgage is for you. They offer the security of knowing exactly what you’ll pay each month.
But you’ll pay a premium for this, fixed rate mortgages carry slightly higher interest rates than tracker mortgages. So, if you are convinced interest rates won’t rise to an unaffordable level a tracker mortgage may be a cheaper option.
How long you fix for should reflect what you feel is most likely to happen to interest rates. There is no right answer here, but there are some highly educated guesses. Use our mortgage rate index to get the very latest rate predictions to help you make an informed decision.
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Mortgages come with a variety of fees that you need to watch out for. Frequently, a lender will advertise a rock-bottom interest rate to draw in customers but they’ll rack up the fees so they aren’t making any less money on the deal. Here are the fees to watch:
This is the lender’s charge for the administration of setting up your mortgage. These have crept up in recent years and some can be as much as £2,000. But you don’t have to pay it upfront. It can be added to your mortgage, but bear in mind this means you’ll pay interest on it, increasing the overall cost of your mortgage. A high arrangement fee isn’t necessarily a bad thing; if you have a large mortgage, paying a higher arrangement fee in order to get a lower interest rate can save a lot of cash.
If you want to leave your deal early many lenders will penalise you. The penalty is usually calculated as a percentage of the loan or a fixed fee. You’ll trigger a penalty if you pay off your mortgage entirely and, sometimes, if you try to overpay.
This is an important charge to check. Many lenders charge a fee to close a mortgage when you’ve paid it off. Despite brokers estimating that it costs lenders around £50 to close off a mortgage this fee has soared recently with some mortgages carrying a £200 fee. The regulator has stated that lenders must not profit from this fee but are yet to act against lenders who are charging large amounts. So make sure you check what you’ll pay before you accept a mortgage offer. It may be masquerading under another name, so look out for a deeds fee, discharge fee, redemption fee, sealing fee, or vacating fee.
At the end of your fixed deal your mortgage will be automatically moved onto a new rate – usually the lender’s standard variable rate (SVR). These rates can be significantly more expensive than your fixed rate. So you need to be ready to move.
If your fixed rate mortgage is coming to an end, start planning three to six months before you’re lumped onto your lenders SVR. There are thousands of borrowers on SVRs who could save hundreds or even thousands of pounds every year if they remortgaged.
There are three key decisions to make when selecting a fixed rate mortgage:
This will help you decide the term of your fixed rate, whether it’s two, three, five or ten years.
If you only plan to stay for three years, don’t get a deal for longer as you may end up paying early redemption fees.
The more money you can bring to the deal, either in the form of a deposit or equity in the property if you’re remortgaging, the cheaper the deal you’ll be able to get.