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Fixed rate mortgage in 2024 – is it worth it?

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Fixed rate mortgages are very popular in the UK.
Fixed rate mortgages are very popular in the UK.

What makes a fixed rate mortgage different?

A fixed rate mortgage is a type of mortgage whose interest rate remains the same for a fixed period of time, e.g. 2 years, 3 years, 5 years, 10 years.

Źródło: Halifax

Lending and borrowing rates depend on a number of factors, but the most significant is the interest rate – this is the rate at which the Bank of England lends to commercial banks such as HSBC, Barclays, Tesco Bank and Santander.

With variable rate products, your instalment rate will change with any, even the smallest, change in the Bank of England base rate. This, of course, means additional risk, which not everyone is prepared to take, especially when it comes to paying off a house. The solution to this problem is, of course, a fixed rate mortgage.

Choosing such a product means, above all, great psychological comfort and financial stability – your monthly instalments will not increase for a certain period of time, which increases the predictability of your future expenses. Depending on the mortgage agreement, you will pay the same for your home for 2, 3 or even ten years.

However, there are two sides to every coin – fixed-rate mortgage instalments will not fall even if the Bank of England cuts the base rate. This means that while others will be paying less, you won’t feel any difference until you remortgage, which will incur extra costs.

By way of conclusion, let us now cite the advantages of a fixed rate mortgage in the UK:

  • A fixed-rate mortgage will be slightly cheaper than a variable-rate mortgage;
  • A fixed-rate mortgage will definitely make it easier for you to plan your household budget, as you will be paying exactly the same amount for years to come, regardless of Bank of England policy;
  • Because of the lower interest rates, a fixed-rate mortgage will be an opportunity to borrow more money, which is crucial for many people on lower incomes.

And the disadvantages:

  • At the time of writing this article, mid-April 2024, the likelihood of further interest rate rises in the UK is quite low. All the indications are that instalments on variable rate mortgages will fall, so fixed rates may not be viable;
  • When interest rates fall, the interest on a fixed-rate mortgage will be the same until its rate is updated.

For how long can the interest rate be fixed?

As a rule, the interest rate freeze does not last for the entire duration of the mortgage, but only for the first few years. After the expiry of the preferential agreement, interest is already calculated on a conventional, i.e. floating, basis. A very important part of financial planning is therefore to determine for which period you want to lock in your interest rate.

As a legitimate mortgage broker in the UK, we need to signpost our clients to products that are reasonable and sensible to choose. Therefore, over 95% of the mortgages we sell have interest rates frozen for 2 years. Our experts collectively believe that the likelihood of interest rate cuts in the near future is so high that suggesting the purchase of other products is simply not justified.

Of course, there are some exceptions – many banks’ policies are structured in such a way that the longer the interest rate lock-in period, the lower the total cost of finance. This means that a mortgage with a fixed interest rate locked in for 5 years makes sense, but only if the amount borrowed is really high. This is because the cost of the eventual remortgage will be proportionately much lower, and an interest rate differential of 0.1% per annum on £500, £600 or £700k even translates into real savings.

We should add at the same time that the current offers from the banks indicate quite clearly that analysts expect interest rates to fall. Otherwise, a longer period of these preferential terms would translate into higher interest rates, yet the opposite is true.

How long to take out a fixed rate mortgage in the UK?

The vast majority of fixed-rate mortgages are two- or five-year contracts. There are other products available on the market, but for a number of reasons, they are not very popular.

Two-year, and therefore the most popular, deals offer the most flexibility. They are most suitable for borrowers who want to actively manage their mortgage and change their offer regularly, or those who are considering a move in the near future. They are also an option for those who expect interest rates to fall in the relatively near future.

Five-year contracts protect mortgage rates for a longer period of time, and are also currently cheaper. The prospect of locking in an interest rate for five years can be attractive, but you need to consider whether you really want to commit to a contract for such a long period.

If you need to repay your mortgage during the fixed rate period (e.g. if you relocate or remortgage), this can be very costly, as you will usually have to pay an Early Repayment Charge (ERC).

Whatever your prediction, it is always worth consulting an experienced credit adviser who knows what is currently happening in the market and will be able not only to discuss the pros and cons of each solution with you, but also to calculate it accurately.

Can you overpay a fixed rate mortgage in the UK?

Many people, for various reasons, want to overpay and pay off their mortgage as quickly as possible. Can you do this with a loan and a fixed rate?

Yes! Most fixed rate mortgages allow you to overpay up to 10% of the balance each year, either in the form of regular overpayments or one annual payment.

Please note: when making overpayments, it is worth being careful, as exceeding the 10% cap could result in you paying an ERC. It is best to ask the bank to provide information on how much we can overpay without additional charges.

What happens when a fixed rate mortgage runs out?

When the fixed rate period comes to an end, the mortgage lender moves the customer onto a Standard Variable Rate (SVR) mortgage. Each lender sets its own SVR rate and this can change by any amount at any time.

In the period of approximately 3 to 6 months before the end of the fixed-term mortgage we can apply for a new mortgage. If with the same bank, this is called a “Product Transfer” if with a different provider, this is called a “Remortgage” and we can thus avoid switching to a mortgage with a standard variable interest rate SVR.

I hope the article answers basic questions about fixed rate mortgages. For more information, please see the article: Fixed rate morgages on the MoneyHelper website.

As always, I encourage anyone who is ready to start the process of buying a property and is struggling to find the right mortgage to contact me.

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Think carefully about securing other debts against your home. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services and some forms of Buy to Let mortgages are not regulated by the Financial Conduct Authority.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts
secured on it.

Your Home (or property) may be repossessed if you do not keep up repayments on your mortgage or any other debts secured on it. Conveyancing services are not regulated by the Financial Conduct Authority.

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