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What Is A Fixed-Rate Mortgage?
When buying a new home, your mortgage lender will give you the option of a fixed-rate mortgage or a variable-rate mortgage.
A fixed-rate mortgage is when the interest rate on your mortgage stays fixed for the duration of your mortgage payment period.
These home loans are perfect for new homeowners who want to keep their monthly payments fixed.
Variable-rate mortgages, on the other hand, will see homeowners make different monthly payments as the interest rate fluctuates. These mortgages usually start at a lower interest rate than fixed-rate home loans.
Benefits And Drawbacks
Fixed-rate home loans have their unique advantages and disadvantages:
Benefits
- Allows homeowners peace of mind as their monthly mortgage repayments are fixed.
- Helps first-time and seasoned buyers budget and plan their finances.
- Protects against fluctuations in mortgage rates.
- Allows buyers to take advantage of favourable mortgage rates when buying a new home.
Drawbacks
- Usually has a higher interest rate than other mortgages.
- More expensive than a tracker mortgage or adjustable-rate mortgage.
- Your payment stays fixed even when there are significant drops in interest rates.
- When your current fixed-rate deal ends and you have not negotiated a new deal, your repayments might increase significantly.
- When paying off your mortgage or switching mortgages before the end of your mortgage period, you are liable for an early repayment charge.
How Long Can I Fix My Mortgage For?
You can opt for short-term fixed-rate deals over two or five years.
Some mortgage lenders also offer three-, seven, and 10-year mortgage deals. In these cases, the mortgage instalments would stay the same regardless of increases to the Bank of England base rate and mortgage rates.
Homeowners can fix their mortgages for the entirety of their repayment period by signing up for a new fixed-rate loan before their current deal expires.
Two-Year vs Five-Year Fixed Mortgages
Two-year fixed-rate home loans
With a two-year fixed-rate agreement, your monthly mortgage repayments remain fixed for two years.
After these two years, your mortgage’s interest rate will automatically adjust to your mortgage broker’s standard variable rate (SVR). You can avoid this instalment adjustment by negotiating a new deal with your current broker or switching brokers before the end of your fixed-rate period.
Advantages:
- You’re able to remortgage your home sooner
- Lower fixed-rate deals
- Buyers are not bound into a long-term financing commitment
Disadvantages:
- Homeowners can only take advantage of the fixed favourable interest rate over a short period
- Offers less financial certainty
- New mortgage rates and fees apply when your short-term, low-interest deal ends
Five-year fixed-rate home loans
Opting for a five-year fixed-rate agreement will see your monthly instalments stay fixed for five years.
You can enjoy the benefits of another five-year fixed-rate home loan if you negotiate a new deal with your mortgage broker before the current deal ends. You can also switch to another mortgage broker.
You won’t, however, be able to move to a more affordable financing option before the end of your five-year agreement without paying an early repayment charge.
Advantages:
- Helps homeowners avoid increasing mortgage rates over the short term
- Gives customers more financial certainty
- Gives you more time to save for a new mortgage
Disadvantages:
- Has higher interest rates than short-term fixed mortgages
- Longer-term financial commitment
- Homeowners can’t take advantage of payment reductions when mortgage rates fall
Which is better?
You need to consider your immediate and long-term needs and plans when deciding on your loan term.
If you’re looking to remortgage or buy a new house soon and you want to take advantage of possible lowered interest rates, a two-year deal works best. If you plan to stay put for longer and want to benefit from a low, fixed interest rate – even when interest rates increase – then a five-year deal is for you.
Remember, the longer your fixed-term deal, the less your chances are of taking advantage of lowered mortgage rates, should they decrease.
Choosing The Fixed-Rate Agreement That Suits You
Consider the following when deciding which fixed-rate home loan to choose:
- Financial situation: Calculate what monthly payments you can afford. If your current budget is tight, choose a longer-term fixed-rate agreement to enjoy fixed repayments for longer. Just remember, you’ll end up paying more in the long run.
- Credit score: Buyers with poor credit scores will pay higher interest rates and financing charges.
- Risk tolerance: If you prefer to avoid risk, choose a short-term fixed-rate loan. If you are willing to take on some risk, select a longer-term mortgage to benefit from lower mortgage payments over the lifetime of your loan.
- Job security: If you’ll continue working at your current employer for a long time, a long-term fixed mortgage may work best. A short-term fixed mortgage may be the preferred option if you are uncertain about your long-term job security.
- Plans: If you plan to stay in your new home for long, choose a long-term agreement. If you plan on buying a new house or moving somewhere else soon, choose a short-term fixed-rate loan to avoid penalty charges when you decide to sell.
Exiting A Fixed-Rate Agreement
Depending on a range of circumstances, homeowners may want to exit their mortgage early.
Can you exit your fixed-rate home loan deal early?
Yes, homeowners can exit their fixed deals before they expire.
If, for example, you have found a great deal with another mortgage broker or decide to sell your house before the end of your current mortgage agreement, you can cancel it.
To avoid higher interest rates when your loan ends, start negotiating for a new mortgage deal in the last six months of your current agreement.
What are the implications of breaking my fixed-rate agreement?
Exiting your deal before it expires has the following disadvantages:
- You will be liable to pay an early repayment charge (ERC)
- You will also pay other administrative penalties
- Your exit negatively impacts your credit score
Consult with your mortgage broker to find the solution that best suits you.
FAQs
What happens at the end of my fixed-rate agreement?
When your current fixed deal ends, your mortgage will automatically move to your lender’s standard variable rate.
If current mortgage rates are higher than your initial rate, your payments increase. To avoid this, negotiate a new deal with your mortgage broker before your loan expires. You can also approach another broker to find a better deal for your new mortgage. On the other hand, if the new rates are lower than your expiring deal’s rate, your instalments can decrease, helping you save money.
What is a standard variable rate?
A standard variable rate (SVR) is the rate your lender will charge you when your current mortgage deal ends. A standard variable rate mortgage will see your repayments fluctuate monthly, depending on the current interest rates.
Sources:
https://www.nutsaboutmoney.com/mortgages/should-i-fix-my-mortgage
https://themortgagereports.com/84696/fixed-vs-adjustable-rate-mortgage-pros-cons
https://yescandomoney.com/guides/fixed-rate/2-or-5-year-fixed-rate-mortgage/