How does a fixed-rate mortgage work?
With a fixed-rate mortgage, your interest rate is set for an agreed period and will not move, whatever happens to the Bank of England base rate or to the lender’s standard variable rate (the SVR, the default rate your mortgage sits on once a deal ends). Your monthly payment stays the same for the whole fix, so budgeting is straightforward.
When the fixed period ends, you usually roll onto the lender’s SVR, and that rate tends to be a good deal higher than the fixed rate you were on. It is why most borrowers line up a new deal before, or soon after, their fix runs out.
You can take a fixed rate on a repayment mortgage or an interest-only one, and nearly every UK lender offers them. They work for first-time buyers, people moving home, and anyone remortgaging from an existing deal.
What are the benefits of a fixed rate?
The main benefit is certainty. You know what your mortgage costs every month for the length of the fix, which makes planning the rest of your budget far easier. If rates climb while you are fixed, your payments hold steady, and that can save you thousands of pounds.
Fixed rates are also easier to live with day to day. A set payment feels less stressful than a variable one that could move at any point, especially when rates are rising or the wider economy feels shaky.
What are the drawbacks?
The main catch is the early repayment charge, or ERC, a fee for leaving the deal early. Pay the mortgage off early, overpay past the allowed limit, or switch deals before the fix ends, and you will usually be charged 1% to 5% of what you still owe. On a sizeable balance that runs into thousands of pounds, and it ties your hands.
You also lose out if rates fall while you are fixed. Your payments stay put, but anyone on a variable rate or a tracker mortgage would watch theirs drop. Across a long fix, that missed saving can add up if rates fall a long way.
Longer fixes usually start at a higher rate than shorter ones, because the lender is promising to hold that rate for longer and prices in the risk. You pay a bit extra for the added certainty. Whether that pays off depends on where rates go.
What happens when the fix ends?
Unless you do something, your mortgage drops onto the lender’s SVR when the fix expires. An SVR often sits 1 to 3 percentage points above the best fixed rates, so being parked on it can add hundreds of pounds to what you pay each month.
Most lenders get in touch a few months before your fix ends and offer a product transfer, which means moving to one of their current deals. You can also remortgage to a different lender if the rate is better. Begin three to six months before the fix expires and you get the widest choice, with no spell stuck on the SVR.