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What is a fixed-rate mortgage?

What is a fixed-rate mortgage?

A fixed-rate mortgage is one where your interest rates and repayments stay the same for an agreed period of time. For instance, with a two-year fix, you know exactly what your payments will be for the next 24 months.

Fixed-rate mortgages are more expensive than variable-rate mortgages, but you’re paying for absolute certainty. The risk is that if you fix and then interest rates fall, you could be paying lots more than you need to.

A 2 year fixed rate mortgage is the shortest-term fixed home loan that you can get in the UK. You can also get much longer terms, including five- or even 10-year fixed rates.

If you want to get out of your fixed-rate early, for instance to remortgage and take advantage of lower rates, you usually have to pay a hefty penalty fee. Some lenders will let you overpay on your mortgage penalty-free. Rules vary by lender, but many say you can overpay a maximum of 10% of the outstanding balance each year. This is well worth doing, particularly if rates are rising and your fixed period is coming to an end.

How to compare 2 year fixed rate mortage deals

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Who is Mojo?

Mojo is a free online mortgage broker. We partner with them so you can get all the mortgage support you need in one place.

Mojo will find out about your circumstances, check your eligibility, and search across the whole of market to help you secure the best mortgage for your circumstances.

An expert will be on hand to offer help and advice and you will be supported through each step of your mortgage application.

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Is a two-year fixed-rate mortgage right for me?

Is a two-year fixed-rate mortgage right for me?

Choosing a mortgage depends on several factors including your risk appetite, what you think will happen to interest rates and how much you like certainty. If you want to know what your repayments will be each month, then fixing is a good option, but you still need to consider how long to fix for. A two-year fix gives you some security, albeit for a short time period.

Shorter fixes are good if you think you might move home fairly soon. Not only will your fixed term end sooner, but the penalties are usually lower if you choose to pay off your mortgage before the term ends.

If you think interest rates will go up over the next few years, then you face a sharp jump in repayments when the deal runs out. Equally, when it's time to remortgage, you usually face fees for doing so. 

Longer fixes give you certainty for a lengthier period and mean you’ll remortgage less frequently so those costs will be lower. But fixing for longer usually means signing up to a more expensive deal.

With a variable mortgage, when interest rates drop, mortgage repayments will too. But, with a fixed-rate mortgage, they'll stay the same – as you're locked into your deal. You might then feel like you're paying more than you should be for your mortgage. 

Variable rates are also generally cheaper, so if you’re confident rates will stay low, or you can afford small increases in repayments, this might be a better choice for you.

If you want to fix but think interest rates will fall, a shorter fix might be better than a longer one as you can move to a cheaper deal sooner.

Can I get a fixed mortgage for more than 2 years?

Yes, there are several options available to you when it comes to fixing your mortgage.

Some of the most popular deals are 2 year or 5 year mortgage fixes, but 10 year fixed rate mortgages are also becoming more common due to the uncertain economic climate. 

In some cases, you can fix for even longer. If you want absolute certainty, then it’s possible to get a lifetime fixed rate that lasts until your mortgage is fully paid off.

Generally speaking, when deciding which term is best for you – you need to balance risk versus cost. The longer your fix, the more you pay, but the greater the certainty you get in return.

If you decide to go for a two-year deal, it's important to compare mortgage rates available to you.

How much can I borrow with a 2 year fixed rate?

How much you can borrow will depend on your personal circumstances. Lenders have specific criteria they use, regardless of whether you’re opting for a fixed or variable interest rate.

Banks and building societies will consider how big your deposit is and use a multiple of your monthly salary to determine what they will offer you. Typically, providers offer loans worth four or four-and-a-half times your income. For instance, if you earn £50,000 a year, you should comfortably be able to borrow £200,000.

They’ll also take affordability into account. They’ll look at any other debts and loans and may factor in financial commitments such as child maintenance. You can use our mortgage calculator to work out roughly how much you might be able to borrow.

Do you need a large deposit to get a 2 year fixed rate mortgage?

Most lenders will consider a mortgage if you have a deposit of 5% or more. Some will even offer you 100%, for instance, if you have a guarantor. That means you don’t necessarily need a large deposit to get a 2 year fixed rate mortgage.

However, the lower your deposit, the higher your LTV will be. And most lenders offer more attractive rates for people with lower LTVs. That means having a big deposit will significantly impact your monthly repayments and your chances of getting a good deal.

The very cheapest 2 year fixed rate mortgage deals are usually only available to people who can put down a huge deposit, such as 40% or more. First-time buyers might be more likely to choose a variable mortgage, to avoid the more expensive deals.

Will I pay a fee when I take out a new 2 year fixed rate mortgage?

Lots of mortgages will involve a fee when you take them out. Common ones to look for include arrangement fees or a broker fee. There will also be a transfer fee for making sure the money is transferred to your bank account and to the seller (normally via a solicitor). 

If a mortgage doesn’t have a fee attached, that usually means you’ll pay higher interest rates. Often, this means saving money at the outset, but it will cost you more in the long run. Calculate carefully to make sure you’re getting the best deal.

Mortgage lenders have to include all fees in the Annual Percentage Rate of Charge or APRC, which makes it easier to compare all the options on offer.

Some lenders will waive certain fees if you are remortgaging with them, so this is worth factoring in when your current deal comes to an end. You might also want to consider the size of the fee in comparison to how big your mortgage is. 

Other factors to look at when comparing 2 year fixed rate mortgages

When choosing a 2 year fixed deal, you generally want to find the lowest interest rate available to you, as this will lead to the smallest repayments available. However, there are some other factors to consider:

Loan to value

The bigger your deposit, the better the rate you’ll get. If your deposit is small, make sure you’re shopping around thoroughly, and consider whether a variable rate might be cheaper for now and then fixing when you later remortgage.

Initial rate 

Once your fixed rate comes to an end, you’ll be shifted onto a Standard Variable Rate (SVR). These vary from lender to lender, but they’re often costly – especially if interest rates have risen. Explore remortgaging before your deal ends to avoid expensive tariffs.

Other fees and charges

Don’t forget to consider fees and charges alongside the headline rate. Things to consider include whether you’re allowed to overpay (and by how much), fees if you want to leave early, valuation fees and arrangement or broker fees.

Advantages of 2 year fixed rate mortgages

  • Certainty and security with fixed repayments for two years

  • Better rates than other, longer fixes

  • You’re not locked in for too long and early exit fees are lower

  • Decent rates on offer for buyers with high deposits

Downsides of 2 year fixed rate mortgages

  • If rates fall, you won’t get lower repayments while you are fixed

  • Higher interest rates than variable-rate mortgages

  • If rates rise, you’re only protected for two years then costs will increase

  • Overpayments are limited and there are often fees for early exits

What happens after the fixed-rate ends on my mortgage?

When your 2 year fixed rate mortgage deal comes to an end, you’ll be moved to the SVR. You don’t have to stay there though, you have several options available:

Do nothing

If you do nothing, you'll automatically be moved to your lender's standard variable rate (SVR). This may be higher than your fixed rate (especially if interest rates have risen), and it will certainly be more expensive than the best variable rates your lender offers, so it’s far from ideal. 

Switch but stay with the same lender

You could switch to another mortgage deal with your existing lender. This could be another fixed rate mortgage or a variable rate deal. Speak to your lender a few months before your 2-year deal ends to discuss your options.

Remortgage

You could remortgage by switching your mortgage to another lender. Make sure you shop around to see what’s available and make sure you take any valuation fees or arrangement fees into account when choosing.

The key point is not to simply accept what your current lender is offering – and do your research to see what deals you can get. This can save you thousands of pounds, so it’s worth setting aside the time. Use comparison tables and brokers to find the lowest rates, but factor in any charges for applying for a new deal.

Nisha Vaidyaquotation mark
Fixing your mortgage rate for two years is a good way to lock in consistent mortgage costs without worrying about longer-term changes to interest rates.
Nisha Vaidya, Mortgage Editor

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