A five-year fixed-rate mortgage allows you to lock in the interest rate on your home loan for five years. That means your monthly repayments will not increase during that time - even if the Bank of England base rate rises.
This can be useful for people on a tight budget or anyone who wants peace of mind that their monthly costs will remain affordable. It’s especially helpful if you think rates are likely to rise over the coming years. However, it usually comes at a higher cost and means that if the Bank of England lowers the base rate, you won’t benefit.
Fixed-rate mortgages are popular with first-time buyers because of the financial security they can provide. There are lots of competing providers, so it pays to shop around and find the best 5-year fixed-rate mortgage.
The other main type of mortgage is a variable-rate mortgage, which includes tracker mortgages and discount-rate mortgages. With these types of mortgages, the interest rate, and thus your repayments, can change from month to month.
Variable-rate mortgages are often good value if the base rate stays steady, but they can leave homeowners facing sharply rising bills if the Bank of England pushes up interest rates.
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Whether or not to fix your mortgage depends on how much flex you have in your monthly budget, what you think rates might do and how important security is to you. If you are worried about how much your mortgage could rise and you can’t afford for interest rates to go up, a five-year fixed rate deal is well worth considering.
If you’d prefer not to lock in your mortgage rate for as long as five years, you could also consider a two-year or three-year deal. Alternatively, if you prefer to lock in for even longer, some mortgage lenders offer fixed-rate deals of up to ten years or more.
There are many advantages to taking out a five-year fixed-rate mortgage. These include:
Helping you budget by guaranteeing your monthly payments
Fixing costs so that they don’t change if the Bank of England base rate goes up
Protecting you against banks and building societies increasing their rates
Helping you plan for other expenses such as home improvements
Reducing how often you need to remortgage and pay associated fees
There are also several drawbacks you will need to consider:
No benefit if interest rates fall after you’ve locked in
Expensive early repayment fees if you want to overpay, move home or remortgage
Less flexibility if your financial circumstances change
Interest rates are generally higher compared with variable-rate deals
Fixed-rate mortgages can have higher arrangement fees
The best five-year fixed mortgage deal will depend on how much deposit you have saved. Most lenders will require a deposit of at least 5%, but if you can set aside more, you’ll have a better loan-to-value ratio and will get more attractive offers. That means more affordable repayments and lower interest rates.
It’s important to shop around and compare providers to ensure you’re getting the best price possible. That way, you can be safe in the knowledge that you’re choosing a mortgage that’s affordable and right for your circumstances.
The lender usually moves you onto its standard variable rate (SVR) when your fixed-rate mortgage ends. The SVR is generally higher than your fixed rate, and your monthly repayments could increase significantly. For this reason, it’s best to shop around and remortgage to a new deal at this point.
You can either remortgage to another fixed rate, locking in payments for between three and ten years, or explore alternative options such as a tracker mortgage.
A two-year fixed-rate mortgage is less of a long-term commitment and gives you more flexibility. However, you also have less security. Two-year fixes usually have the lowest interest rates and smallest monthly repayments, but you will need to pay mortgage fees 2.5 times more often than with a five-year fixed-rate mortgage.
A ten-year fixed-rate mortgage gives you security for much longer than a five-year fixed mortgage, but that comes at a cost. Interest rates are usually higher and if you need to get out of your deal early, you could have to pay a hefty penalty fee.
Another alternative is a discount mortgage. This is a mortgage with a variable interest rate set below the lender’s standard variable rate (SVR) – often by 1–2%. This amount is called the discount.
Your mortgage rate and monthly repayments can go up and down, depending on how the bank or building society sets its SVR. For instance, if the Bank of England increases the base rate, mortgage companies typically follow suit – if yours does, your costs will go up.
If you don’t want to choose a fixed-rate deal, you might prefer a variable-rate mortgage, such as a tracker. These follow another index or interest rate, usually the Bank of England base rate. If that rate goes up, your tracker mortgage rate will follow suit, but if it falls, you’ll also pay less.
Tracker mortgages are often cheaper than even the lowest five-year fixed-rate mortgage, but there’s the added risk of the interest rate going up and your mortgage repayments increasing.
If you’re keen to avoid fees, a lifetime tracker mortgage lasts for your entire mortgage term. You should be able to change your deal at any time with no early repayment charges, but these mortgages tend to cost more than shorter-term tracker deals.
An offset mortgage allows you to reduce the amount of interest you pay by linking your savings to your home loan. The value of your savings and credit balances is deducted from your mortgage when interest is calculated - meaning lower monthly repayments overall. Usually, you can access your savings, but you won’t earn any interest on them.
The Bank of England has been raising interest rates recently, and they look like they're still on the rise. A longer-term fixed mortgage might help keep your repayments down for longer. ”Nisha Vaidya, Mortgage Editor
The lender will move you to its standard variable rate, which is likely higher than the fixed rate you were on, meaning you will pay more each month. It is best to remortgage to a new deal as soon as possible.
Yes, but many lenders charge you for overpayments. You’ll also usually have to pay a hefty fee if you want to switch before the end of the fixed term.
Yes. Many providers offer fixed rate deals for as long as ten years. Habito and Kensington Mortgages offer fixed rate deals for up to 40 years, but this is unusual.
Use a comparison site to see what deals are on the market and how rates change depending on the length of your fix. You can compare all mortgages, including those fixed for one, two, three, five and ten years.
All credit applications appear in your credit file. If you’re rejected, this can negatively affect your score, and several rejections can damage your rating significantly. For this reason, it’s best to space out your credit applications by three to six months. Even a successful application might change your score – this could be an improvement as you’ve got a mortgage or a temporary drop as you have more debt.
At the time of writing, the average five-year fixed-rate mortgage ranged from 1.68% to 3.9%, depending on the lender and the type of deal on offer.
However, it’s important to factor in any fees or costs when looking for the cheapest mortgage rate. You may find it’s cheaper to opt for a deal with a higher interest rate and no fee rather than one with a lower interest rate but a high fee.
The best five-year fixed mortgage will typically have low fees, a competitive interest rate and will allow you to borrow up to 95% of the property’s value.
The Bank of England has been increasing rates recently, which means many of the very best deals have vanished from the market. That said, there are still bargains to be found, particularly if you think rates will continue to increase. If you value security and the knowledge that your payments will remain affordable, a five-year fix is always worth considering.
Ultimately, this is your decision to make and will depend on your specific circumstances. However, if you want to make sure that you’ll be able to afford repayments if rates go up, it’s worth thinking about fixing. You should compare fixes of different lengths and make sure you shop around to get the best possible deal on offer.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
|Based on borrowing||£170,000 over 25 years||The overall cost of comparison||4.46% APRC Representative|
|Initial rate||3.34% fixed for 2 years (24 instalments of £884.45pm)||Subsequent rate (SVR)||4.66% variable for the remaining 23 years (276 instalments of £944.66pm)|
|Lender fee||£517||Total amount payable||£282,470.34|
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