Fixed rate mortgages

What is a fixed rate mortgage?

Choosing which type of mortgage is right for you can seem a daunting task. With thousands of products available, how do you know which one to go for?

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What is a fixed rate mortgage?

A fixed rate mortgage has an interest rate that stays the same for a set period. Typically, this is anything between two and five years, although there are longer terms on the market of 10 years or more.

With a fixed rate deal, your repayments are the same every month and you don't need to fear an increase in interest rates. The rate will remain the same over the specified period, no matter what happens to the Bank of England's base rate or the lender's standard variable rate (SVR) during that time.

That of course means that if the base rate falls during your fixed period, your rate will not reduce.

At the end of the fixed rate period the rate will revert to the lender's SVR, which will usually be higher than the rate you were paying on your fixed deal.

Type of fixed rate mortgage

MoneySuperMarket data, correct as of December 2017.

Advantages

The main advantage of a fixed rate mortgage is that it gives you the security of knowing exactly how much your monthly repayments will cost, irrespective of what happens to interest rates.

This means you can budget for other household costs without fearing your mortgage repayments could suddenly shoot up.

For first-time buyers or homeowners on a tight budget, fixed rate mortgages are particularly appealing, as they provide a stable, monthly repayment.

Disadvantages

Interest rates on fixed rate mortgages can be higher than on the cheapest offers available, which tend to be discounted variable rate mortgages.

Lenders charge a premium for fixed rate deals because they’re obliged to honour the rate regardless of what happens to interest rates generally during the fixed period.

If the Bank of England was to reduce the base rate, anyone on a fixed rate mortgage wouldn’t see their repayments fall – but those on variable mortgages would.

Most fixed rate mortgages will also charge you a penalty, known as an early repayment charge (ERC), if you apply to get out of the deal before the end of the fixed term. 

Average deposit, price and loan to value

MoneySuperMarket data, correct as of December 2017.

Choosing a fixed rate deal

When choosing a fixed rate mortgage it’s important to consider how long you want to fix your rate for. Would you prefer to lock in for two years, or would you be happier plumping for a five or even a 10-year deal?

Your decision will depend on how important this security is for you, and what you think will happen to the Bank of England base rate. For example, you may want to set your repayments for five years, but this will see you miss out on a cheaper deal if rates fall. Alternatively, if they rise, you'll be glad you locked into a fixed rate deal.

You should also consider how long you’re planning to stay in your current home. There’s little point picking a five year fixed rate mortgage if you’re planning to move house in two to three years.

And remember, the longer the fix, the higher the rate tends to be.

It’s also wise to check how big a deposit you need to access the best deals, as many of the cheapest fixed rates will only be available to those with a large deposit of 40% or more.

This tends to be out of reach for first-time buyers, who have an average deposit of around £40,000 – but is a great opportunity for anyone looking to remortgage, as their average deposit is in the region of £140,000.

Look at the maximum Loan to Value (LTV) ratio on offer from each mortgage to work out if you can apply.

Loan to value over time

MoneySuperMarket data, correct as of December 2017.

Comparing fixed rate deals

Once you know how long you want to fix your mortgage and how big a deposit you have, you can search mortgage deals to find the best and most suitable for you.

Just be aware that while you will want to search for the best interest rate to ensure your repayments are as low as possible, you should also 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 high fee.

Average monthly mortgage repayments

MoneySuperMarket data, correct as of December 2017.

 

You can keep track of how base rate changes could affect your mortgage repayments by using our handy base rate calculator.

MoneySuperMarket makes it easy to choose the right fixed rate mortgage. Our comparison service is free, independent and online.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

 

The figures and information provided by this tool are for illustration purposes only

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