Let’s be real for a minute. Navigating the world of mortgages is complicated. There are just so many different types of deals and rates available. It’s way too easy to feel unsure about which option is right for you. The end result is often that you’re left craving a bit of certainty (and the knowledge that once the deal is done, you can stop thinking about mortgages for a while!).

Luckily, one of the most common mortgage options you’ll encounter delivers certainty in spades. Because these fixed-rate mortgages are designed for people who like to know what’s going to happen.

If you want fixed-rate mortgages explained, this guide is for you. We’ll explore in simple terms how they work, the pros and cons of this sort of borrowing, and help you understand if locking in your rate is the best move for your situation in the UK property market.

 

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Fixed-rate mortgages explained…

A fixed-rate mortgage is a type of home loan where the interest rate you pay stays exactly the same for a set period known as the ‘fixed term’ or ‘initial deal period’.

Common fixed terms in the UK are two, three, five or even 10 years. During this time your monthly payments remain constant regardless of whether the Bank of England Base Rate or other market interest rates go up or down.

This predictability makes them a very popular choice for UK homebuyers.

How do fixed-rate mortgages work?

Fixed-rate mortgages are pretty simple. During the agreed fixed term (for example, five years) your interest rate is ‘locked in’. So if your rate is fixed at 4.5% you’ll pay 4.5% for the entire five-year period, giving you peace of mind about your monthly outgoings.

However, the sting comes after the fixed term ends. At this point you typically move onto the lender’s Standard Variable Rate (SVR). This SVR is usually higher than your initial fixed rate and can change over time, influenced by the Bank of England Base Rate (but not always directly tracking it).

All this means your monthly payments might jump significantly once your fixed deal expires. For example, someone who was able to get a competitive five-year fixed-rate rate of 1.87% in 2020 would be about to move onto their lender’s SVR of 7.49% and see their monthly payments soar as a result.

These potentially significant increases are exactly why many people choose to remortgage onto a new deal before this happens.

How long should you fix your mortgage rate for?

Choosing the length of your fixed-term is a key decision with this sort of mortgage. Common options include:

  • Two-Year or Three-Year Fixes
    These deals often come with slightly lower initial interest rates but mean you’ll need to review your mortgage again sooner potentially facing new fees and uncertain future rates.
  • Five-Year Fixes
    For many, these are the sweet spot of fixed-rate deals, offering a good balance of payment security and rate competitiveness.
  • 10-Year Fixes (or longer)
    Longer term fixed-rate mortgages offer maximum payment certainty for a long period but may start at a higher interest rate than shorter fixes. Crucially they often come with substantial Early Repayment Charges (ERCs) for the entire term limiting flexibility if your circumstances change.

The best length depends on your priorities, your tolerance for future rate changes and how likely your plans are to change during the fixed term.

What to consider with fixed-rate mortgages

Fixed-rate deals offer clear benefits but also have potential drawbacks to consider.

Pros:

    • Payment certainty
      With fixed-rate mortgages, you know exactly how much your mortgage payment will be each month during the fixed term. This makes budgeting easier.
    • Protection against rate rises
      If market interest rates go up your payments won’t change during the fixed period.
    • Peace of mind
      When your rate is fixed, you can reduce financial stress associated with fluctuating interest rates.

Cons:

  • You’ll pay more if the rate falls
    If market interest rates drop significantly during your fixed term you won’t benefit from lower payments.
  • Potentially higher initial rates
    Sometimes fixed rates can start slightly higher than variable-rate alternatives like tracker mortgages.
  • Getting stung by early repayment charges (ERCs)
    Leaving the deal before the fixed term ends (e.g. moving house, selling or remortgaging early) can incur significant penalty charges. These often apply for the entire fixed period.
  • Arrangement fees
    Like many mortgage deals, fixed rates can come with setup fees.

Are fixed-rate mortgages right for you?

Evaluating your financial situation, risk tolerance and future plans is key to deciding whether to opt for a fixed-rate mortgage. We’d recommend seeking professional advice as well as this can help you make the right choice.

That said, a fixed-rate mortgage could be a strong contender if:

  • You like knowing exactly what your monthly mortgage payments will be for budgeting stability.
  • You are a first-time buyer wanting security during your initial years of homeownership.
  • You believe interest rates might rise and want protection against increased payments.
  • You are generally risk-averse when it comes to your finances.
  • You find thinking about mortgages so boring you want to make one decision and forget about your mortgage for a few years.

However a fixed-rate mortgage might not be the best fit if:

  • You think interest rates are likely to fall soon and want your payments to decrease if they do.
  • You need flexibility and think you might move, sell or want to remortgage within the fixed term
  • Your primary goal is securing the absolute lowest initial rate even if it means accepting payment uncertainty.

OneDome is here to help

Choosing a mortgage is complex but OneDome is here to help. If you have any questions about tracker mortgages, the wider mortgage process or want tailored advice on the different types of mortgages that suit your situation speak to our friendly mortgage advisors today or call us on 01489 555 080 or explore our comprehensive mortgage guide for a more in-depth breakdown.

Your home may be repossessed if you do not keep up repayments on your mortgage.