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Fixed-rate mortgages

Find out how fixed-rate mortgages work, their pros and cons, and whether a fixed-rate deal could be the right type of mortgage for you.

In this article
What is a fixed-rate mortgage? How long can you fix the interest rate for? Should you get a two-year or five-year fixed-rate mortgage?
Fees and charges on fixed-rate deals Fixed vs variable-rate mortgages What happens when the fixed period ends?

What is a fixed-rate mortgage?

A fixed-rate mortgage is a mortgage where your interest rate is guaranteed to stay the same for a set period of time.

This can offer peace of mind because, unlike a variable-rate mortgage (such as a discount or tracker), you’ll know exactly how much you need to repay each month during this period.

There are far more fixed-rate mortgages available than any other type of deal. When we checked in November 2020, 86% of the mortgages listed on comparison site Moneyfacts had fixed rates.

The number of fixed-rate mortgages has fallen significantly since the start of the COVID-19 outbreak. In November 2020, 3,147 fixed-rate deals were available, compared with 4,897 in March 2020.  

 

How long can you fix the interest rate for?

You can currently fix your mortgage rate for one, two, three, five, seven, 10 or 15 years, though one-year and 15-year fixes are rare.

Generally speaking, the longer your fixed-rate period lasts, the higher the interest rate will be.

This is because it is harder for a lender to predict what will happen in the market over a longer period of time - so you're essentially paying for the security of knowing that your rate won't go up no matter what happens.

The table below shows the availability of fixed-rate deals and their average interest rates as of November 2020.

Fixed period Average interest rate Number of deals
Two years 2.53% 1,280
Three years 2.81% 240
Five years 2.83% 1,425
Seven years 3.05% 15
10 years 2.84% 150

 

Correct as of 18 November 2020. Source: Moneyfacts.

Should you get a two-year or five-year fixed-rate mortgage?

The vast majority of fixed-rate mortgages are either two-year or five-year deals. 

Two-year fixes provide the greatest freedom. They're most suitable for borrowers who want to actively manage their mortgage and regularly switch deal, or those who are considering moving home in the near future. 

Five-year deals protect your mortgage rate for longer, but are slightly more expensive. The prospect of locking in a low rate for five years can be attractive, but you'll need to think about whether you really want to commit to a deal for that long.

If you need to pay off your mortgage while you're in a fixed period (for example if you want to move house or remortgage), this can be very expensive as you’ll generally need to pay an early repayment charge (ERC - more on these below).

We recommend that you take advice from an independent mortgage adviser if you’re unsure how long to fix for.

Fees and charges on fixed-rate deals

Choosing a fixed-rate mortgage isn't all about the term and interest rate.

When comparing deals, you should also look closely at their up-front fees, ERCs, and whether you can make overpayments without facing a penalty.

Up-front fees

Fixed-rate mortgages usually come with an up-front fee. Depending on your lender, this might be called a product fee, arrangement fee or completion fee.

Research by Moneyfacts in November 2020 showed the average up-front fee on a fixed-rate deal had risen to £1,078, the highest level recorded since November 2012.

In further bad news for borrowers, the percentage of deals available without a fee dropped from 42% in November 2019 to 34% in November 2020.

Early repayment charges (ERCs)

ERCs on fixed-rate mortgages are charged as a percentage of the outstanding balance.

ERCs on five-year fixes often start at around 5% of the balance in the first year, before reducing by 1% each year thereafter.

This means the ERC structure on a £200,000 mortgage might be as follows:

Year Early repayment charge Charge on £200,000 mortgage
1 5% £10,000
2 4% £8,000
3 3% £6,000
4 2% £4,000
5 1% £2,000

These charges mean that if you’re likely to be moving house within the next five years, you might want to consider a shorter-term fixed-rate deal or a five-year product with no (or low) ERCs.

Overpayments

Most fixed-rate mortgages allow you to overpay up to 10% of the balance each year, either in regular overpayments or on an ad-hoc basis.

If you overpay more than this amount in a 12-month period, you may need to pay an ERC.

You can get an idea of how much you can save in interest by using our mortgage overpayment calculator.

Fixed vs variable-rate mortgages

Fixed-rate mortgages differ from variable-rate mortgages, where your monthly repayments can go up or down because of changes to the Bank of England base rate.

Historically, fixed-rate mortgages were more expensive than variable-rate deals such as discount or tracker mortgages, but this isn't necessarily the case anymore.

There are a couple of reasons for this. Firstly, fixed-rate deals have become so popular and competitively priced that borrowers with big deposits can get very low rates of a little more than 1% on a two-year fix, reducing the incentive to gamble on a variable-rate deal.

Secondly, the COVID-19 outbreak, and the cuts to the base rate that followed, meant many of the best variable-rate deals were withdrawn from the market, making discount and tracker deals less common and less attractively priced.

What happens when the fixed period ends?

When your fixed-rate period comes to an end, your lender will transfer you onto a standard-variable-rate (SVR) mortgage. Every lender sets its own SVR and this can change by any amount at any time.

In November 2020, the average interest rate on a two-year fixed-rate mortgage was 2.53%, while the average SVR was 4.44% - meaning that your repayments on an SVR mortgage could be significantly more expensive.

For this reason it's important to remortgage to a new deal, either with your lender or another provider, before you get transferred onto the SVR. You can arrange this up to six months before your fixed period is due to end.

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