Is a fixed-rate mortgage a good idea?
After the recent rate rises and with all the political and economic uncertainty of Brexit, is now the right time to fix your mortgage and if so, for how long?
Should I fix my mortgage deal?
Earlier this month, the Bank of England increased the base rate from 0.5% to 0.75 per cent - only the second rate rise in a decade. This is the first time it had risen above 0.5 per cent since March 2009. Borrowers are likely to be worried about future rate rises and how the UK’s future relationship with the EU will affect their mortgage. The big question is now a sensible time to lock into a fixed-rate mortgage. And if so, for how long? We consider the pros and cons.
Pros of a fixed-rate mortgage
- A fixed-rate home loan means you pay the same amount for the length of your fixed deal whether it’s two, five or ten years. This will shield you from any fallout from Brexit, leaving you safe in the knowledge your mortgage will not rise.
- For those on a tight budget, a long-term fix can offer peace of mind. It means your payments will stay the same right through until 2028 (if you choose a 10-year fix) regardless of possible future rate hikes by the Bank of England.
- Fixed deals have become more attractive as competition between lenders caused rates to fall. Fixed rates can be cheap when interest rates are low, you may end up paying less in the long run.
Cons of a fixed-rate mortgage
- Fixed rate mortgages can be more expensive than variable mortgages as you pay a premium for the extra long-term security in the form of higher interest rates.
- If you lock in for a long period, you could end up paying significantly more than you would have done with a variable mortgage, such as a tracker, if interest rates only slightly increase or fall again.
- You could face hefty early repayment charges if you exit early before the fixed term is up for reasons such as redundancy, new job, marriage or divorce. Some fixed term mortgages are ‘portable’, meaning you can keep the same deal when you move home, but this is often at the lender’s discretion.
- For those who already have a mortgage, switching to a new deal isn’t always cheaper even if there are lower rates available. You need to do the maths and factor in all the costs such as early repayment charges, product and valuation fees.
Two, five or 10 years?
Deciding to fix your mortgage rate is only half the decision. You also need to work out how long you want to lock in for. Typically, the longer the term, the higher the interest rate tends to be. The rates on the best 10-year fixes are usually beaten by the cheapest two and five-year deals.
When a mortgage deal comes to an end, borrowers will typically revert to their lender’s standard variable rate (SVR). This is a variable rate mortgage and the lender sets the interest rate, which can change by any amount and at any time.
In August 2018, the average SVR is 4.2% - many times higher than cheap fixed deals. If you’re on a SVR, huge savings are likely if you can remortgage to a new fixed-rate deal, either with your lender or another bank or building society. But remember to factor in the arrangement fees. The smaller the mortgage, the bigger the impact of fees.
Long term fixes also come with higher early repayment charges, so you need to take that into account too. A 10 or five-year fix is probably not suitable if you plan to move before then. On the plus side, the deal will last for longer, so you won’t have the hassle of remortgaging in two years again, paying more fees and possibly higher interest rates in the future.
Get expert help
If you’re unsure whether to opt for a fixed-rate mortgage and how long to fix for, it’s important not to make a hasty decision. Seek expert advice from professional mortgage advisors so you can find the best option for your individual circumstances.