Amid the ups and downs of the current mortgage market it can be difficult to decide if getting a fixed rate deal on your mortgage makes sense. We weigh up the options available to you.
A fixed rate or fixed term mortgage deal is one that will secure the rate of interest applied to your mortgage – and your monthly repayments - for a number of years, after which you will typically revert to the lender’s Standard Variable Rate for the remainder of your mortgage term (unless of course you switch).
In the current unstable economic climate, with the Bank of England base rate plummeting to a historic low of 0.5%, fixing your mortgage may seem a sensible course of action to take. Doing so will mean that repayments on your mortgage will remain the same for the duration of the deal – irrespective of any fluctuations in the base rate or the mortgage market as a whole.
For example, you might select a mortgage that ties you to paying an interest rate of 5% over a term of 5 years. The repayments on your mortgage will also be fixed, so you’ll be paying exactly the same amount each month of the term.
Fixing your mortgage offers financial stability as it provides you with reassurance that your repayments will remain the same from one month to the next, without the risk of a sudden unexpected rise. This makes fixed term deals perfect for those who wish to stick to a tight budget, as they know exactly how much they will be re-paying each month.
Fixed rate mortgage deals also offer you protection against rising interest rates.
Rates are at an all-time low at the moment, but they are likely to rise as the economy starts to improve. If you are on a Standard Variable Rate (SVR) or tracker deal this means the amount of interest you repay (and therefore the amount you pay monthly) could increase significantly
What's more, there's no guarantee that lenders will keep their SVRs in line with the Bank of England base rate. They can raise them at any time by any amount they choose; so even if the base rate stays at rock bottom, there's no guarantee that your mortgage rate and repayments won't increase.
So by fixing your mortgage now when the rates are low, you are protecting your finances for the future when rates are likely to rise.
You're also likely to get a better deal on a fixed rate mortage now than when the base rate goes up, simply because while low rate fixed term deals are currently available, if lenders' costs increase they are likely to be withdrawn.
The potential drawbacks of fixing your mortgage include the fact that during your mortgage term, anything could happen to the base rate and the economy overall. The base rate may stay at a low of 0.5% for your term’s duration, and your mortgage lender could hold their standard variable rate at an equally competitive level. If you are tied in to a fixed term deal paying 5% this could be extremely frustrating.
Similarly however the base rate could rise to more than 5%, in which case you would be in a much more favourable position, as you would still be paying only 5%.
Therefore you will have to decide if you are prepared to take a risk by waiting to see what happens to interest rates as the economy improves, or if you’d prefer to secure yourself into a fixed rate deal now.
There are several potential costs associated with fixing your mortgage, so it’s important to factor these in to your overall calculations and comparisons before making a decision.
You should also consider how you’ll feel if you fix your mortgage now, but interest rates remain low throughout your mortgage term. There is no way to put a number on this, but you could end up paying much more than necessary if you fix your mortgage to a rate that quickly becomes uncompetitive as the economy picks up. Ultimately this will depend on your attitude to risk, and whether or not you’re happy to gamble against future rate rises.
You will need to take into account the arrangement charge of fixing your mortgage. Some mortgage providers offer low fixed interest rates but make up for this by charging a higher arrangement fee. Similarly you might be offered a higher fixed rate but a more reasonable arrangement charge. This is something you’ll have to weigh up before deciding on the best mortgage arrangement for you.
You will also need to consider how you’ll pay the arrangement fee as this will impact its total cost too. Adding it to your mortgage debt rather than paying for it up front will make it more costly in the long run as it will accumulate interest with the rest of your mortgage.
Valuation and Solicitors’ Fees
It’s important to factor in the cost of valuation for your mortgage, and fees for your solicitor to survey your home. These can vary from property to property but can become an unexpected extra cost if not taken into due consideration.
However some of these charges may not apply if you remortgage on to a new fixed rate with your existing lender.
Early Redemption Charges
Switching your mortgage before its term is up also comes with associated costs, so consider this before applying for a long-term static-rate deal. If halfway through your term you decide that you would prefer to switch your mortgage to a more competitive rate, you will usually have to pay an early redemption charge. You’ll have to weigh up whether you would ultimately save money by doing this, but it’s worth bearing in mind that not many people do.
This will usually be a sizeable fee to pay, especially if you decide to redeem your mortgage early in its term. Your lender will not want you to pay off your mortgage early, because doing so will mean less interest paid to them.
Additionally you should always make sure that you familiarise yourself with the terms and conditions relating to early repayment or redemption of your mortgage before you sign on the dotted line. Find out about clauses such as whether or not your lender will allow you to move your mortgage to another property during the term, or if you are allowed to make over-payments without incurring a penalty. These are all things to take into consideration when thinking about fixing your mortgage.
When it comes to looking for a fixed rate mortgage you will have the choice of either entering into a short or longer term deal. Again, which is more suitable will depend on your financial circumstances and attitude to risk.
Benefits associated with longer fixed-terms include being able to have the reassurance of a rate that you are happy with for a number of years, and being protected from interest rises during that time.
Those tying in to a longer fixed term may find it reassuring to have their interest rate fixed for a longer amount of time, particularly in the current climate when any kind of mortgage deal is harder to come by.
Longer term fixed deals also mean that you don’t have to worry about the hassle and expense of shopping around for another deal in a couple of years.
On the other hand short term deals are can be a good idea if you want to switch from rate to rate, as you’ll have the reassurance of knowing you can move to another deal in a couple of years if your rate becomes uncompetitive.
Take a look at our guide Long Term vs Short Term Mortgage Deals for help deciding which is right for you.
Those who will get the most benefit out of fixing their mortgage are individuals who need to keep to a strict budget, and so will be better off knowing exactly how much they will have to pay each month.
It can also be an attractive and advantageous option for those who don’t necessarily need to budget, but like the reassurance of paying a fixed amount ever month - and knowing that their agreed interest rate will not rise during the mortgage term.
If you decide not to fix your mortgage there are a number of different options available.
Generally many mortgage deals will revert to a Standard Variable Rate (SVR) when the introductory deal expires, which will represent your lender’s ‘standard’ mortgage rate.
Traditionally SVRs are a more expensive option; however in the current climate many are finding them a reasonable way to tick their mortgage payments along while benefitting from the low interest rates, without the immediate cost of arranging another deal.
Equally, many people are finding that they have to stick with their mortgage lender’s SVR, because of the current lack of mortgage lending availability.
Staying on your current mortgage lender’s SVR isn’t a problem while rates are low, but it’s important to remember that they can rise at any time. Although they are somewhat linked to movements in the base rate, they are largely dependent on a number of provider-determined factors. So it can be a good idea to keep an eye on the rate you’re paying, and look into changing deals when it starts to become less competitive.
Alternatively, you may want to opt for a tracker mortgage. These are designed to follow the ups and downs of a lender-determined measure, usually tracking a couple of points above the Bank of England base rate or the lender’s SVR.
Like an SVR, this gives you the flexibility of knowing your rate could go down at any time, but also presents the risk that your repayments will increase substantially as and when the measure rises.
A capped mortgage deal may also be worth looking into. You will still pay a variable interest rate but this will usually have a ‘ceiling’ meaning that your rate will not be able to go over a certain amount. A capped mortgage tends to be slightly more expensive than trackers, as you get the flexibility of a tracker but with added protection.
Bear in mind that currently the Bank of England base rate is at its lowest ever, so if you’re not currently tied into a deal you may want to ride out the low rates and hold off fixing for the time being, especially if you are saving money.
You might also want to take the opportunity to make overpayments on your mortgage (assuming you can do this penalty-free and have spare money available), in order to reduce the overall amount you’ll have to repay.
If you aren’t currently on a fixed mortgage, consider your individual circumstances and how you would cope if and when interest rates rise.
If you can comfortably manage this, then staying as you are while keeping an eye on interest rates may be a good way to save on your mortgage. However, if you don’t think you’d be able to manage sudden rises in interest, fixing your mortgage may be a better option.
Of course, as with any other financial product you should weigh up all the benefits and drawbacks of a particular mortgage deal before you buy. Remember to include all fees, terms and conditions before you sign up, as you’ll need to take into account the total cost rather than just interest rates.
It is advisable to compare all the products available on the market and see an independent, whole of market broker if you aren’t sure where to start.
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