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Fixed-rate mortgages

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What are fixed-rate mortgages?

When you take out a mortgage to buy a home, your monthly payments are based on the amount you borrow and the interest charged by your lender.

The interest rate can vary substantially based on your credit rating, loan-to-value, and the kind of mortgage you choose.

A fixed-rate mortgage is when your interest rate stays the same for an agreed period, typically two, three, five or 10 years. Although often more expensive initially, these arrangements are popular because you have certainty over repayments and know they won’t shoot up if interest rates rise.

They are an alternative to variable-rate offers where your interest payments can fluctuate each month.

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How do fixed-rate mortgages work?

With a fixed-rate mortgage, the interest payments you make each month are fixed at a certain rate for an agreed period of time. 

Offers typically last for two or three years but can be for longer, with some lasting five or even 10 years.

You pay slightly higher than the market rate at the start in return for guaranteed monthly repayments. If interest rates rise or market conditions worsen, you know that your lender can’t change your interest rate and your payments will stay affordable. On the other hand, if interest rates fall – you won’t benefit.

Different lenders offer different fixes, so it’s really important to shop around to get the best deal. Having a bigger deposit and a good credit rating can significantly reduce the interest rates you’ll be asked to pay.

Once the deal ends, you’ll be switched to your lender’s standard variable rate (SVR) unless you remortgage.

Fixed-rate mortgages are popular, but there are several factors to consider before signing up for a deal.

How to find the best fixed-rate mortgage for you

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Why choose a fixed-rate mortgage?

Deciding which mortgage is right for you will depend on your risk appetite, what you think will happen to mortgage rates and how much you value certainty.

If you want to know exactly what you’ll pay for the next few years, a fixed-rate arrangement can buy peace of mind. On the other hand, you may prefer a cheaper tracker deal, even if there is a risk that it could end up being more expensive if interest rates rise.

What happens when my fixed-rate period ends?

When your fixed-rate period comes to an end, you will be moved to the provider’s standard variable rate. These are set at the discretion of the lender and can increase or drop at any time.

SVR mortgages are typically the most expensive, so in most cases, you should consider either fixing again or swapping to a different variable deal to lower your repayments.

Advantages of a fixed-rate mortgage deal

  • Your mortgage payments are safeguarded against any increase in interest rates or your lender's standard variable rate during the fixed-rate period.

  • If it looks like interest rates will go up, a fixed-rate mortgage deal will help to protect you from rising repayments.

  • Fixed-rate mortgages make it easier to budget because you know exactly what your repayments will be for the duration of the fix.

Disadvantages of a fixed-rate mortgage deal

  • Unlike SVR mortgages, if you want to pay off your fixed-rate mortgage early you may be subject to an early redemption penalty, which can be expensive.

  • If interest rates fall, stay level, or only rise a small amount, you’ll usually end up paying more than you would on a variable deal.

  • You won't benefit from lower repayments if interest rates fall.

What else should you consider when choosing a fixed-rate mortgage?

When signing up for a fixed-rate deal, there are other important things to consider.

For instance, while you’ll be protected from interest rate rises during the fixed period, when it comes to an end you may find that remortgage options are much more expensive.

Try to put some money aside during the term of your fixed-rate mortgage to help you to meet any higher repayments later on.

Also, think about whether you’re likely to want to move and when that might be. Many fixed-rate mortgages charge early repayment fees, so you should check whether your mortgage is portable, enabling you to move it to a new property.

There may also be limits on how much you can overpay your mortgage each year. Make sure you check the terms and conditions before you sign up.

When comparing deals, you should factor in any up-front charges, such as arrangement fees, as well as the interest rate to look at the total cost over the deal period.

Claire Flynn - Senior Mortgages Editor at Uswitch
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The majority of mortgage holders are choosing fixed rate options these days, as they provide certainty to your household budget over the course of the initial period. There are lots of different fixed-rate options out there so speak to an expert to find the most suitable one for you. ”

Claire Flynn

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