When you apply for a mortgage or remortgage you need to choose which of the available interest rate products you would like. There are broadly 2 types, interest rates which change and interest rates that stay the same.
Here we provide an overview of fixed rate mortgages, where the interest rate stays the same.
What is a fixed rate mortgage?
With a fixed rate mortgage the interest rate is fixed at the same rate for a set period of time.
EXAMPLE
3.25% fixed for 2 years
In the example above your mortgage payments will be calculated at 3.25% for the duration of the first 2 years of your mortgage.
Fixed rates make monthly budgeting much easier as your repayments don’t change.
Your fixed rate is unaffected by changes to other interest rates, so whether they go up or down, your monthly repayments will stay the same.
If you had a tracker rate mortgage instead then your monthly payments would change each time the Bank of England announced a new base rate.
What are the different types of fixed rate mortgage?
The mortgage lender will normally offer a few different fixed rates to choose from. These will be for different periods of time: 1 year, 2 year, 5 year etc.
The interest rate you will be charged varies according to how long you fix for, and most fixed rates rise as the fixed period gets longer.
Lenders will often specify a maximum Loan to Value (LTV) for their fixed rate products. This means that borrowers need to have the correct size deposit to qualify.
EXAMPLE
3.25% fixed for 2 years – Max 90% LTV
In this example you need to have at least 10% deposit or equity to be able to choose the product. If you only had a 5% deposit you could not opt for this rate.
Many lenders offer cheaper rates for lower LTV as their mortgage risk is reduced as the borrowers stake increases.
EXAMPLE
| LOAN TO VALUE (LTV) | 2 YEAR FIXED INTEREST RATE |
|---|---|
| 90% | 2.44% |
| 80% | 1.69% |
| 60% | 1.09% |
What happens when the fixed rate ends?
Your chosen rate will be fixed for a specific period of time. Once this ends you will be transferred to the lenders standard variable interest rate (SVR). This is normally higher than the rate you were paying and is to be avoided.
To move away from the SVR over to a more competitive interest rate you have 2 choices:
- Mortgage Product Transfer – Choose a new interest rate from the same lender.
- Remortgage – Choose a new interest rate by moving your mortgage to a new lender.
Your existing lender will write to you a few months before the end of the term and will offer you some new rates to choose from.
This is a good opportunity to go back to your mortgage broker to check whether these are the best possible rates.
Mortgage Early Repayment Charges (ERCs)
Early Repayment Charges are exit fees that apply during the interest rate product term.
You have to pay ERC’s if you want to leave your current mortgage interest deal before the product end date..
You don’t usually have to pay any ERC’s if you’re currently on your lender’s standard variable rate (SVR).