We’ve asked Emma Lunn, a freelance personal finance journalist, to tell us her views on fixed rate mortgages.
Emma writes regularly for national papers including The Guardian, The Daily Telegraph and The Mirror as well as specialist titles including Moneyweek, Moneywise and Mortgage Strategy.
To fix or not to fix?
August saw the Bank of England raise the base rate from 0.5% to 0.75%. While the move wasn’t entirely unexpected, it was only the second rise in more than a decade.
Whether the base rate rise will affect your mortgage depends on what type of mortgage you’re on. If you're on a variable rate mortgage, your rate is likely to go up. If you're on a tracker mortgage, it definitely will. But if you’re on a fixed rate mortgage, the rate you pay won’t change until the end of the fixed rate period.
Why you should consider fixing your mortgage
Put simply, fixing your mortgage means you don’t have to worry about changes to the base rate. A rate rise might seem scary to a lot of borrowers. The base rate has been 0.5% or lower since March 2009, meaning a whole generation of mortgage borrowers have become used to historically low rates.
A fixed rate mortgage can protect you from the fallout of future rate rises. This type of mortgage offers a set interest rate for a certain period of time. For example, a building society might offer a two-year fixed rate at 1.5%. So you’ll know exactly how much you’ll pay each month, making budgeting a lot easier. And if the base rate rises, there’s no need to worry as your payments will stay the same.
How variable rate mortgages work
Variable rate mortgages work in a different way. Each mortgage lender will have a standard variable rate (SVR). This will be higher than the base rate (normally 3 or 4% higher) and will vary between lenders. Mortgage lenders can change their SVR whenever they want but, in general, SVRs go up and down in line with changes to the base rate.
Some lenders offer mortgages at the SVR, but more commonly it will be the go-to rate at the end of fixed rate. For many, this change in pay-rate acts as a prompt to remortgage.
A tracker mortgage is a type of variable rate mortgage which “tracks” the Bank of England base rate. If the Bank of England base rate goes up or down, your monthly payments will definitely change.
Put simply, fixed rate mortgages offer security while variable rate mortgages are more risky. If you want to know exactly what your mortgage payments will be for a set period of time, a fixed mortgage is your best bet. If you’d rather take a punt on interest rates – and benefit if they go down – a variable rate mortgage is a good choice for you.
How long should you fix for?
If you decide to go for a fixed rate mortgage, your next decision is how long to fix for. Most people fix for two or five years but these aren’t the only options. You can also fix for three, seven, or even 10 years. In general, the longer you fix for, the higher the rate will be.
The big selling point of fixed rates is security – you know how much your payments will be. The main downside is the financial penalties (called “early redemption charges” or ERCs) if you want to exit the deal, move house or remortgage before the end of the fixed rate.
These charges can be quite expensive, especially in the early years of a fixed rate. But the good news is you can avoid these charges by looking for a “portable” mortgage – this means you can take the mortgage with you, penalty-free, when you move house.
Is a short-term fix right for you?
If you opt for a two-year fixed rate mortgage you are likely to have the pick of the best rates on offer as two-year deals tend to be the cheapest.
You’ll know exactly what your mortgage payments will be for two years and then be able to take advantage of any competitive rates on offer when your fixed rate ends. If you need to move house or remortgage to release equity, you can plan to do this at the end of the fixed period.
A two-year fix might sound like the perfect choice but there are a couple of things to think about. Firstly, assuming you remortgage when the fixed rate ends, this will come around surprisingly quickly and you’ll need to go through affordability assessments, credit checks and property valuations all over again. This is a necessary, but not a fun, process.
And if rates have risen or your property has decreased in value you may find your next mortgage is more expensive.
Rates on five-year fixed rates are usually higher than two-year deals, but cheaper than seven or 10-year fixes. In return, you’ll be able to budget for a longer period and you won’t have to worry about interest rate changes or remortgaging for five years.
But if your mortgage isn’t portable, you’ll need to think about what will happen if you need to move house within five years as early repayment charges are likely to apply. You might plan on staying put but life can be unpredictable (you may get married, start a family, change job or get divorced within the next five years) and you may need to move house. And if the base rate falls, and mortgage deals get cheaper, you might feel frustrated that you’re stuck on what has become an uncompetitive rate.
Is long-term security worth the extra cost?
If you fix for 10 years, you’ll know how much your mortgage payments will be for a decade and you won’t have to worry about the base rate, house prices or the hassle of remortgaging for a long time. You’ll pay more for this security though as rates will be higher than on two or five-year deals. Longer fixes can be a good option if you’re settled in your home, and want to budget for the long-term.
If your circumstances do change and you want to move house, don’t worry. Many long-term fixed rates are portable and you’ll be able to take your mortgage with you to your new home. It’s best to check this with your mortgage lender before taking out a long-term fix. Bear in mind you may find you need to undergo an affordability assessment and other checks during the porting process, but you can rest assured that your interest rate will stay the same.