Fixed-Rate Mortgages – A Beginner’s Guide to Fixed-Rate Mortgages

Our team at The Mortgage Heroes have put together this guide to fixed-rate mortgages to explain what they are, how they work, and the pros and cons they present.

What is a Fixed-Rate Mortgage?

There are two main types of mortgages; fixed or variable. As the name suggests, fixed mortgage deals are monthly payments that don’t change for the durations of the agreed period, whereas variable payments may change monthly, quarterly or annually.

Fluctuations in payments are often dictated by the economy and interest rates. As interest rates rise and fall, variable mortgage rates will similarly rise and fall, making monthly payments less predictable.

For a fixed-rate mortgage, the interest rates you pay monthly stay the same over the deal, regardless of how rates may fluctuate externally over the same time. This means fixed-rate mortgages provide stability and peace of mind to those who want to know exactly what they will pay back each month.

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How Long is a Fixed-Rate Mortgage?

Fixed-rate mortgages are usually fixed for between two to five years, but longer terms of 10 years or more are possible.

Generally, the longer the rate is fixed, the more it will cost. Although the rate you pay doesn’t change, the rate may be higher for longer terms than shorter ones. This is because lenders are taking a bigger risk of sustaining your interest rate regardless of external changes, meaning they may miss out.

However, shorter terms, of say 2 years, may incur additional costs as you need to change deal more regularly. These upfront fees every few years can add up and make the numerous shorter terms more expensive overall than a reduced number of longer terms.

Cost isn’t the only important factor though. Peace of mind and stability may be very important for you, and therefore a longer term fixed-rate mortgage may be preferable.

If you leave your property within the next few years, because of family growth for example, or you want to benefit from possible interest changes in the coming years, shorter term fixed-rate mortgages may be preferable, as they give you more flexibility.

Can you Leave a Fixed-Rate Mortgage Early?

If you want to leave your fixed-rate mortgage before the fixed term ends, you can, however this will incur penalties. Lenders will want to make up for lost interest and charge you a percentage of your outstanding debt.

What Happens When the Fixed Period Ends?

Once the fixed period ends, you will usually be moved onto your lender’s Standard Variable Rate (SVR). This means payments go from fixed to variable, according to the base rate of the Bank of England – interest rates.

SVRs offer homeowners flexibility, usually allowing for mortgage deal changes without incurring Early Repayment Charges.

Are you looking to remortgage? Read our useful remortgage FAQs blog.

Benefits of Fixed-Rate Mortgages

Fixed-rate mortgages provide insurance against fluctuating interest rates affecting monthly payments, ensuring stability and peace of mind.

Pros

  • Certainty – You know exactly how much your mortgage repayment will be for the fixed term.
  • Stability – Payments will not increase no matter how interest rates fluctuate.
  • Predictability – You can budget your money well knowing your monthly expenditure.

Cons

  • Security costs – Rates may be higher for fixed-rate mortgages than variable ones.
  • Fixed – Your payments will not decrease if interest rates fall.

Penalties – Getting out of the fixed period early can result in costly penalties

Fixed-Rate Vs Variable Mortgages

Depending on the level of security you want, a fixed-rate mortgage may be for you. They provide peace of mind against interest hikes but do generally come at a cost for that.

However, price isn’t the only consideration. If you struggle to make the monthly mortgage payments, interest hikes through a variable mortgage could be troublesome.

Those with plenty of disposable income may be accepting of the higher risk of discount or tracker variable mortgages as these may work out cheaper in the long run.

Learn More With The Mortgage Heroes

At The Mortgage Heroes, we are experts in sorting mortgages for homeowners, and first time buyers, in a variety of circumstances. Whatever your unique situation is, we can help you get a good deal that suits you. We also offer our expertise in getting associated insurance, such as life, landlord and building insurance.

If you are looking for your ideal mortgage, don’t hesitate to get in touch today!

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See more: Loan-to-Value (LTV) – Understanding Loan-to-Value & How it Works

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