With so many different choices, offers, and lenders to choose from, applying for a mortgage can feel like a minefield. Are you deciding between a short-term fixed-rate mortgage and a long-term deal? These handy advantages and disadvantages of each choice can assist you in making your decision.
How long should you fix your mortgage for?
As home buyers strive to beat future interest rate hikes, most mortgages are fixed, and the length of time people fix their rate for has increased.
According to the most recent market figures (in 2020), nearly half (48%) of new mortgages were for fixed rates of five years or longer.
This is the first time that longer contracts have surpassed two-year contracts (40%). In fact, fixed rate mortgages accounted for 91% of all mortgages.
Although borrowers have traditionally preferred shorter-term fixes of two years, longer-term fixed rates are becoming more competitive, you might be tempted to lock in for the long haul.
Here, we look at the benefits and drawbacks of each timeline to see if we can address the question, “How long should I fix my mortgage for?”
The pros of fixing for 5 or 10 years
Are you concerned about the possibility of increasing interest rates? If you answered yes, you might be interested in some long-term fixed payments to protect you from the possibility of those rates increases. Furthermore, some mortgages allow you to lock in for ten or even fifteen years.
Fixing for ten years means you can sit back and relax, knowing precisely what your monthly mortgage payments will be for that time span, regardless of what happens in the broader economy.
This will make it easier for you to prepare and manage your finances, knowing that your mortgage payments will not change.
It’s also worth mentioning that, while longer-term fixed rates used to be much higher rates than 2,3 or 5 years, they are not so different these days because rates are at an all-time low.
The cons of fixing for 5 or 10 years
However, while a 10-year fix can sound appealing, you should think twice before committing for that long because if you need to leave during that period, you may be subject to high Early Repayment Charges.
To put it another way, if you have to break the contract early due to an unexpected occurrence like divorce, serious illness, redundancy, or a work change, it may be quite costly.
If you don’t know what you’ll be doing – or where you’ll be living – in ten years, a short-term fix is more likely to make sense.
The pros of fixing for the shorter-term
Short-term fixes, such as two or three years, have much more flexibility than a 5 or 10-year fix; rates are typically lower, and are very competitive.
If you believe you may want to move in the next couple of years as this property may be a stop gap before your big purchase or you want the lowest rate available on the market at present, then a 2 year fixed is best.
On the other hand, a five-year fix might be the solution if you’re looking for medium-term stability, as it will provide some longer-term stability if interest rates start to rise while not tying you down for too long.
The cons of fixing for the shorter-term
On the downside, if you want a shorter-term solution, you would have to remortgage in two, three, or five years.
This means you’ll have to switch to a new deal with your current lender or remortgage to a different lender but many people do take this option as it is more financially viable and cost effective to do so, however in 2, 3 or 5 years interest rates could be much higher and you could end up paying more than if you were on a longer term fixed, but this is the age old question people have.
You’ll also have to pay the arrangement fees again (which are now on average £1,000) and potentially pay a much higher interest rate, but this all depends on what happens in the future with interest rates.
Who is best suited to a shorter-term fix?
Your own circumstances and plans determine the length of time you can fix for.
If you’re a first-time buyer, for example, the circumstances are likely to change in the next ten years.
For example, if you purchase a property with a family member or a friend it could be an issue because if you are tied in to a 10-year fixed rate and your friends find partners and wish to move in with them and they may wish to come off of the mortgage with you to buy with their new partner. This then makes their goal more unachievable because they may not be able to borrow the amount of money, they need to buy a new place because they are also liable for the mortgage you are both on together. There are potential ways around this so best have a chat with our experts to discuss what you could do in this scenario.
Many first-time buyers see their first home as a steppingstone to the next step up the property ladder, so locking into a long-term fixed rate when they’re young isn’t necessarily a good idea. Best talk to someone to get some advice which most advisers will do for you.
Who is best suited to a longer-term fix?
Someone older and more stable, such as married with children in school or whose children have left the nest, could be better suited to a longer-term fixed rate.
The effect of fees on a mortgage rate
It would help if you didn’t focus solely on the attractively low prices. If there is a charge associated with the mortgage, it may significantly impact the amount you pay. In fact, a mortgage with a higher rate but a lower fee could be less expensive.
Arrangement fees, completion fees, booking fees, and application fees are used to describe these fees.
They all actually do the same thing: if you add them to the mortgage, they increase your borrowing by a certain amount and you will pay interest on that money. If you can afford to pay the arrangement fee when you apply for the mortgage, then that is always the best thing to do. Use the representative APR (annual percentage rate) to compare various mortgages since it covers the overall cost of borrowing. It gives you an idea of the overall cost.
In simple terms a higher interest rate with a low or no arrangement fee is normally better for people with small mortgages i.e., under £100,000 but it depends on a few things so please contact us and we will find the cheapest overall deal for you.
Other risks of fixing
If you try to remortgage or move and you cannot get a mortgage with the same lender then you will be charged an early Repayment Charge with your current lender which could end up being thousands of pounds. There are only a few fixed rates on the market with no early repayment Charges.
Get in touch with of our mortgage saving experts today.
How do you find the right mortgage deal?
Check you’re getting the cheapest one by comparing deals and calculating the monthly cost or by talking to one of our mortgage experts. You can compare thousands of mortgages for first time buyers, moving home, buy to let or Remortgaging within our site as well. Choosing a mortgage: the key questions to ask yourself:
How long am I likely to stay in my home?
Consider when you plan to move up the property ladder. If you’re planning on taking your second move in a few years or have a growing family, a longer-term fixed rate potentially isn’t for you.
However, most high street lenders allow you to “port” your mortgage top a new property so if you tied into a 5-year fixed rate you may be able to exercise the “portability” option in the terms and conditions of your mortgage which allows you to move the mortgage over to a new property without paying any early Repayment Charges. I must stress that if you do this you must re apply for the mortgage and you must be able to qualify for the mortgage again in its entirety otherwise you will not be able to port the mortgage. In other words, you have to reapply for the entire mortgage as if you were a brand-new customer. This is a great option if you have it on your mortgage.
How much security do I require?
Consider a longer loan if you like the consistency of paying the same amount per month and want to be protected from any interest rate increases.
Will I get around to Remortgaging?
If you get a mortgage, you normally go on a lower initial rate for the first few years i.e., for 2, 3 or 5 years but after that rate finishes it reverts to the lenders own Standard Variable Rate (SVR) which is normally a much higher rate. You will need to keep a note of when your rate finishes so you can remember when you need to remortgage to get a better rate, or the other option is the fact that, Mortgage Saving Experts will take that hassle of remembering this away from you because we will contact you around 4 months before your initial rate finishes so we can remortgage you to get you on a better deal than your current lenders standard variable rate which is normally much higher than the initial rate you chose.
Understand the different types of mortgage
What are the different types of mortgages?
There are three main types of mortgage rates:
- Fixed-rate: The interest rate you pay is fixed for a set period of time, usually two to five years.
- Tracker-rate: The interest you pay can go up and down with the Bank of England Base rate (BBR).
- Discounted Variable rate – The Variable rate is the rate which is set by the lender lending you the money and they give you a discount off of their variable rate for the first couple of years.
Other rates are available also so please speak to us if you need more information.
Whatever happens to interest rates, the interest rate you pay will remain constant for the period of the fixed rate. This means if interest rates increase then your fixed rate and your monthly payment stays the same because its fixed.
You’ll see terms like ‘two-year fix’ or ‘five-year fix,’ along with the interest rate paid during that time span.
- You’ll have peace of mind knowing that your monthly payments will remain the same, making it easier to budget.
- If the Bank of England decide to increase interest rates your rate will stay the same because it’s fixed therefore your monthly payments stay the same
- You will not benefit if interest rates decline.
Watch out for
- If you decide you want to sell the property and not buy another or pay the mortgage off because you won, the lottery then you will be charged an early repayment Charge which can be thousands or even tens of thousands of pounds. I suppose if you won the lottery, you wouldn’t really worry about an early Repayment Charge.
- At the end of the fixed period – you can start looking for a new mortgage deal three or four months before the fixed period expires, or you’ll be automatically switched to your lender’s regular variable rate, which is normally higher.
Variable rate mortgages
The interest rate on a variable rate mortgage can change at any time. Ensure you have enough money set aside to cover any increase in your payments if interest rates rise. Variable-rate mortgages come in a variety of shapes and sizes:
Standard variable rate (SVR)
This is the standard interest rate that your mortgage lender charges homebuyers, and it will last for the duration of your mortgage or until you refinance.
Changes in the interest rate can occur as and when the lender who lent you the money decide to increase or decrease their interest rate. The Bank of England does not have to increase or decrease their interest rate in order for your lender to. So, your lender can increase or decrease this rate whenever they see fit.
- Freedom – most SVRs have no Early Repayment Charges so you can overpay or pay off the mortgage at any time without incurring an early Repayment Charge.
- The interest rate on your loan can be decreased at any point during the term.
- The interest rate on your loan can be increased at any point during the term.
This reduction in the lender’s standard variable rate (SVR) is only valid for a limited period, usually two or three years.
It does, however, pay to shop around. Since SVRs vary by lender, don’t assume that a larger discount equals a lower interest rate.
Two banks have discount rates:
- Bank A has a 2% discount off an SVR of 6% (so you’ll pay 4%)
- Bank B has a 1.5% discount off an SVR of 5% (so you’ll pay 3.5%)
Though the discount is larger for Bank A, Bank B will be the cheaper option.
- Cost – the rate starts lower, resulting in lower monthly payments.
- You’ll pay less per month initially.
- Budgeting – the lender has the option of increasing the SVR at any time.
Watch out for:
- If you want to leave before the discount time ends, you may be charged.
Tracker mortgages follow another interest rate, typically the Bank of England’s base rate plus a few percentage points above.
As a result, if the base rate rises by 0.5 per cent, your rate will also rise by 0.5 per cent.
They usually only last two to five years, but some lenders offer trackers that last the life of your mortgage.
- If the rate it is tracking falls, so will your rate and mortgage payments.
- Your mortgage payments would increase if the rate rises.
- If you want to transfer before the contract expires, you will sometimes have to pay an early repayment charge. Many Tracker rates these days do not have early Repayment Charges but some do so be careful if this is important to you
Watch out for
- If you feel the Bank of England Base Rate will rise during your tracker rate period do not chose a tracker rate mortgage.
Capped rate mortgages
These are not very common these days and in fact I have not seen one for quite some time. Normally, your rate increases or decreases either with the lenders own variable rate or the Bank of England Base rate. A capped rate means the rate cannot go above a certain upper level or “cap” which is set at the start of your mortgage.
- Certainty – the rate will not exceed a certain threshold. However, make sure you can afford repayments if it increases to the cap mark.
- Cheaper – if the tracker or SVR falls, your rate will drop.
- The cap is usually set very high.
- The rate is higher than other variable and fixed rates in general.
- Your lender or the Bank of England can change the rate at any point up to the cap limit.
These operate by tying your savings and checking accounts to your mortgage, allowing you to pay only the interest on the difference.
You continue to pay your mortgage monthly as normal, but your savings serve as reducing the amount of interest you pay every month therefore you pay back more capital every month thus, allowing you to pay off your mortgage sooner.
The savings and bank accounts linked to the mortgage do not pay interest on them because they are being used to offset against your mortgage. If you have savings in something which you are earning more than the interest rate being applied to your mortgage, then do not move the money into the offset mortgage because you will be worse off. For example, if your savings are in a stocks and shares ISA and you are earning 6% per year in interest and the mortgage offset interest rate is only 2% then its better you keep your money in the stocks and shares because your return is greater so the offset mortgage would not be worth it
If it is financially viable for you to do this then the savings and bank accounts are instant access, so you can draw on that money the same day. Offset mortgages are only offered by a handful of mortgage lenders.
Take time over your decision
It’s vital not to jump into a decision if you’re unsure how long to fix for.
Do your homework and carefully consider your choices. However, keep in mind that you must consider the overall cost when comparing mortgages, which includes the interest rate and any related fees. If you’re having trouble deciding, seek advice from one of our mortgage brokers by calling us on 01273 738 072 today.
Is it a good time to fix your mortgage?
What is the ideal length of time to fix a mortgage for?
What happens after my fixed rate mortgage ends?
Is fixing for longer a good idea?
Can you get out of a fixed-rate mortgage?
What is the penalty to get out of a fixed mortgage?
What do you do when your fixed term mortgage ends?
- do nothing – your mortgage moves to a variable interest rate with your current lender;
- get another fixed rate from your current lender;
- remortgage with a different lender