What is a fixed rate mortgage?
A fixed rate mortgage is a type of home loan where the interest rate remains the same for a set period of time. The advantage of this is that you know exactly how much you’ll be paying back each month, making it easier to budget and plan for the future.
The other main type of mortgage is a variable rate mortgage, where the repayment amount can fluctuate depending on interest rates. But with a fixed rate mortgage, your payments will remain the same, no matter whether interest rates go up or down.
This type of mortgage is popular with first time buyers for the financial security they provide. It may also be a good idea to go for a fixed rate mortgage if you’re concerned about meeting repayments if interest rates rise.
A potential downside of a fixed rate mortgage is that you’re locked into paying the same amount each month, regardless of changes in interest rates. So, while you won’t have to pay more if interest rates go up, you also won’t benefit from a reduction in your monthly payments if interest rates do go down during your fixed rate term.
Types of fixed rate mortgage
There is a wide range of fixed rate mortgage deals to choose from, with terms ranging from 2 up to 10 years, or sometimes longer. The interest rate you’ll pay varies depending on how long you fix your mortgage rate for. As a general rule, the longer you fix for, the higher the rate will be.
2 year fixed rate mortgages
A 2 year fixed rate mortgage is where the interest rate you pay is fixed for two years. As 1 year fixed rate deals are less common, this is likely to be the shortest term your mortgage interest rate can be fixed for. With this type of deal, your monthly payments won’t change during the two year period, regardless of whether interest rates rise or fall.
Interest rates on shorter-term fixed rate deals tend to be lower than on long-term fixed rate mortgages, so 2 year deals are often considered to be the cheapest fixed rates available.
They are likely to suit borrowers that only need budgeting certainty for a short period of time. A 2 year mortgage may also appeal to you if you’re planning to move or remortgage in a couple of years. They can be a good solution for homeowners who actively want to ensure they have the cheapest possible repayments and the best deal on the market.
3 year fixed rate mortgages
A 3 year fixed rate mortgage is a mortgage deal where the interest rate and your monthly payments are fixed for 3 years. Unlike with a variable mortgage, your payments are set for the next three years, giving you peace of mind when it comes to budgeting.
This type of mortgage can be cheaper than 5 or 10 year deals, so may appeal to you if you’re keen to keep monthly costs to a minimum. If you choose a 3 year deal, rates are likely to be slightly higher than those offered by 2 year mortgages.
Finding the best 3 year fixed rate mortgage for you will depend on your individual circumstances, so seek professional advice if you’re unsure.
After the 3 year fixed rate mortgage period finishes, as with other fixed rate deals, the mortgage will usually revert to the lender’s standard variable rate (SVR), so borrowers may want to start looking around for a better deal shortly before their fixed term ends.
5 year fixed rate mortgages
A 5 year fixed rate mortgage is a mortgage with an interest rate that remains the same for 5 years. When you fix your mortgage rate for 5 years, you have peace of mind that your monthly payments won’t change during this period, regardless of what happens to interest rates. This can be appealing to first time buyers and borrowers who’d like more certainty, as it helps you to manage your monthly costs without worrying about fluctuations in your monthly payments.
Rates on 5 year fixed deals tend to be slightly higher than for shorter-term fixed mortgages because they provide borrowers with budgeting certainty for a longer period of time.
The best 5 year fixed rate mortgages may come with higher arrangement fees, so it’s important to factor these in when working out the overall cost of any deal.
If you’re planning on moving within the 5 year fixed rate period, check that any deal you’re considering is portable and can be transferred to a new property, otherwise, you could face hefty Early Repayment Charges (ERCs).
10 year fixed rate mortgages
A 10 year fixed rate mortgage is a mortgage deal where both the interest rate and your monthly payments are fixed for 10 years - no matter what happens to external interest rates during that time.
Longer-term ten-year mortgages tend to be a bit more expensive than 2, 3 or 5-year deals, but you’ll have the knowledge that your payments won’t change for longer. That means they can be suitable for those who are on a tighter budget and require the peace of mind that their mortgage payments won't change for the next decade.
Getting the best 10 year mortgage deal for you will depend on how much flexibility you’re likely to need over the next decade.
Some 10 year fixed mortgages are portable, so you may be able to transfer your deal to a new property if you move home during the policy period. You will have to re-apply for your mortgage however, and your lender will carry out new affordability checks, along with a valuation of the new property.
Bear in mind that many fixed rate mortgages charge a penalty, known as an Early Repayment Charge (ERC) if you pay them off before the end of the fixed rate period. If you’re considering locking into a 10 year fixed rate mortgage, you’ll need to think carefully about whether your circumstances are likely to change over time. Do you intend on making overpayments to clear your mortgage faster, or are you thinking of moving house in the near future?
For mortgage help and information about fixed rate mortgages, or to find the best deal for your individual circumstances, speak to one of our expert mortgage advisers.
Advantages of a long-term fixed rate
Long-term fixed rate mortgages have several benefits. These include:
- Peace of mind
- Payments won’t change
- Removes worry of remortgaging soon
- Budgeting certainty
- Typically portable if you move
Disadvantages of a long-term fixed rate
If you’re choosing a long-term fixed rate mortgage, there are various disadvantages to consider. These include:
- Usually tied in for the whole period
- Won’t benefit if interest rates fall
- Early repayment penalties to pay if you leave your deal
- Additional borrowing may be at a higher rate
- Must meet lender’s affordability criteria if porting mortgage
Fixed vs variable rate mortgages
Before you apply for a fixed rate mortgage, it’s worth considering how they compare to variable rate mortgages, so you can be certain you’re choosing the right deal for you.
While fixed rate mortgages have an interest rate that is fixed for a set period, variable rate mortgages have an interest rate that can change over time.
These rates are often linked to the Bank of England base rate, which means if the base rate increases, so will your variable mortgage rate and your monthly payments. Conversely, if there’s a base rate reduction, your mortgage rate will also fall, meaning cheaper monthly costs.
There isn’t a huge amount of difference between the initial rate you’ll pay for a fixed or a variable rate mortgage, but if you need certainty that your payments will remain the same for a set period, then you may consider a fixed rate deal a better option for you. However, if you believe interest rates are likely to fall in future, you may prefer to go for a variable rate deal in the hope that your rate will come down over time, reducing the cost of your monthly payments.
Fixed rate mortgage process
If you’ve decided to opt for a fixed rate mortgage, it’s worth knowing how it works. Whether you opt for a 2 or 3 year deal, a 5 year fixed rate mortgage or a 10 year fixed rate mortgage, you’ll usually move onto your lender’s standard variable rate when your term ends, unless you remortgage after the term ends to another mortgage deal.
When choosing how long you want your fixed rate to be, you’ll need to think carefully about whether your circumstances are likely to change. Most fixed rate mortgages are portable, which means it can be possible to transfer your deal to a new property if you move home during the fixed rate period, but you should check the specific criteria of any deal before going ahead.
Remortgaging on a fixed rate mortgage
If you want to remortgage during the fixed rate period, there will typically be Early Repayment Charges (ERCs) to pay for leaving your deal early.
However, you can start your search for your next mortgage deal before your fixed rate finishes as most lenders allow you to lock in your new deal up to six months before you need it to begin. The main advantage of this is that you’ll be able to roll onto your new deal as soon as your current deal ends, rather than moving onto your lender’s more expensive SVR.
Whether you are looking for a fixed rate remortgage, lasting 2 or 3 years or a longer-term fixed rate mortgage over 5 or 10 years, L&C will find the best deal for you.
Fixed rate mortgage eligibility criteria
The eligibility criteria for fixed rate mortgages vary between lenders, but they will look at whether you can afford repayments on your mortgage. Lenders will need proof of your income, and you’ll usually be asked to provide three to six months of payslips.
As well as looking at how much you earn, they’ll need to know how much you spend, so you’ll likely also have to provide bank statements, as well as details of any debts like credit and store cards, loans and car finance.
We’ll ask you about your future plans and whether your circumstances are likely to change, as you’ll have to pay an Early Repayment Charge if you need to redeem your mortgage before the end of your fixed terms - and the associated fees are usually hefty. Use our eligibility engine to find out how likely you are to qualify for a fixed rate mortgage.
