Every month hundreds of thousands of borrowers reach the end of their fixed-rate mortgage deal. In most cases, that means their mortgage payments are set to rise – in some cases by a lot. But you can take action to avert these higher costs. We have detailed a basic guide to fixed-rate mortgages.

What is a fixed-rate mortgage?

If you take out a fixed-rate mortgage, the interest rate on the deal will be locked in place for a fixed period, whether that be two, three, five or 10 years. Put simply, a fixed rate mortgage fixes your monthly mortgage repayments for the deal period.

Your monthly mortgage repayments will still stay the same throughout the fixed term, even if interest rates like the Bank of England’s base rate change.

This means you won’t see a difference in your mortgage repayments during the fixed term, so you’ll know how much to budget for each month for your repayments.

What happens when your fixed rate ends?

When the fixed term comes to an end, the rate will return to the lender’s standard variable rate – SVR – which is likely to be higher than the rate on your fixed deal.

SVRs don’t track the Bank Rate directly but are instead set by individual lenders and go up or down at their discretion. However, they do tend to move more or less in line with wider interest rates, as set by the Bank Rate. So, if you see that interest rates are on the rise, you should expect your SVR to go up sooner or later.

What should you do when your deal ends?

You can either do nothing and pay the higher SVR rate or, depending on your circumstances, you could remortgage to a new deal.

Those that want to remortgage to a cheaper deal should approach their existing lender about better rates three to four months before their current deal ends. However, make sure to compare it against other deals online.

While an SVR is for most people not a good idea, SVRs might be beneficial for those who want to make mortgage overpayments.

That’s because most SVRs don’t have early repayment charges attached, so you can usually pay off your entire mortgage without incurring any penalty.

What are the advantages of a fixed rate mortgage?

Some advantages of a fixed rate mortgage include:

  • Having the security of knowing exactly how much your monthly repayments will cost. A fixed rate mortgage can be a great option for a household with a tight budget, first-time-buyers or for those who like to plan their outgoings in advance.
  • The peace of mind that your repayments won’t increase unexpectedly. Your repayments will stay the same for the deal length, so you know what you’re expected to pay.

 Disadvantages of a fixed rate mortgage

Some disadvantages of a fixed rate mortgage can include:

  • Interest rates on fixed rate mortgages are unlikely to be the cheapest offers available – which tend to be discounted variable rate mortgages.
  • Fixed rate deals are more expensive because the lender is committing to charging that rate for the whole fixed period – no matter what happens to interest rates generally during this time.
  • If the Bank of England base rate falls, you won’t see any decrease in your monthly repayments because your mortgage rate is fixed, which means you could find yourself on an uncompetitive deal.
  • Most fixed rate mortgages will also charge you a penalty – known as an early repayment charge or ERC – if you want to get out of the deal before the end of the fixed term.

A quality mortgage broker can help ensure you do not overlook the best possible deal for your circumstances. While you will want to search for the best interest rate to ensure your repayments are as low as possible, it’s also important to factor in the lender’s fees and other costs and charges. You may find it is cheaper overall to opt for a mortgage with a slightly higher interest rate and low fee than one with a more competitive interest rate but a high fee.

Get in touch with one of our independent mortgage advisers if you have any questions around this topic. T: 02892 605 088 | E: info@fairstoneni.co.uk