In these turbulent economic times, with skyrocketing interest rates, many homeowners are thinking about taking out a fixed-rate mortgage to provide some financial stability to their living expenses. 

But what are the positives and what are the pitfalls?

What’s a Fixed-Rate Mortgage?

A fixed-rate mortgage is a mortgage that runs for a predetermined term within your total mortgage loan period.

With this type of loan, you pay the same amount every month regardless of any changes in the Bank of England base rate.¹

Why Should I Choose a Fixed-Rate Mortgage?

You should choose a fixed-rate mortgage if you want the security of knowing exactly how much you will repay on your mortgage every month, especially if you have a limited budget.

Pros & Cons of Fixed-Rate Mortgages

The pros and cons of a fixed-rate mortgage are important to consider before deciding whether it’s the option for you.

Here are the facts:

Pros

The pros for choosing this type of mortgage are that:

• A fixed-rate mortgage is generally more cost-effective than your lender’s standard variable rate.²
• You have more financial stability because you know exactly how much to budget for every month.
• You get to choose the term of your fixed-rate mortgages. They run for a short-term period of 2, 3 or 5 years, although there are options for longer periods.

Cons

The cons of a fixed-rate mortgage include that:

• You’ll pay higher interest rates than with a tracker or other variable mortgage rates.
• Payments don't vary with market fluctuations, so you lose the advantage of paying less on your mortgage when interest rates decrease.
• You’ll be financially penalised if you opt to leave your fixed-rate mortgage early.
• They generally attract higher fees when you sign up, although these are incorporated into your repayments.

Are There Different Fixed-Rate Mortgage Terms?

Yes, there are different fixed-rate mortgage terms.

These terms generally range from 2 to 10 years, or even longer in some cases.

Your interest rate depends on the fixed-rate mortgage term you choose. The longer the duration of your mortgage, the higher the interest rate and vice versa.

Let’s check the various mortgage terms:

2-Year

A 2-year fixed-rate mortgage is the shortest fixed-term period available and offers the lowest rates.

It's ideal for someone who only needs short-term stability, or who’s planning to remortgage or move house.

3-Year

A 3-year fixed rate has a slightly higher rate than the 2-year alternative.

It’s suitable for homeowners who don’t want to be tied to a fixed-rate mortgage for too long but want the stability of a fixed interest rate.

5-Year

A 5-year fixed-rate mortgage comes with a higher interest rate.

Make sure that if there’s a possibility that you may move within this period, your fixed-rate mortgage is portable to your new property.

10-Year

A 10-year fixed-rate mortgage is at the top end of the time period for a fixed-rate mortgage agreement. Although there are longer periods available, these are rare.

While the rate may be higher, the longer-term stability of a fixed rate is suited for someone on a tight budget. Just be sure you understand the cost implications if you exit your agreement early.

Also, check to see if you can take your mortgage with you if you decide to move during the term of the agreement.

How Do I Decide the Duration of My Fixed-Rate Mortgage?

You can decide on the duration of your fixed-rate mortgage based on a number of factors.

Talk to a financial advisor or mortgage broker about your needs to figure out what the best solution is for you.

Which Is More Important - Cost or Stability?

If you have to choose between cost and stability, a long-term fixed rate gives you more financial security.

If cost is your main concern, choose a shorter-term fixed-rate mortgage.

How Often Do I Want to Remortgage?

When deciding how often you want to remortgage, you have to weigh up whether the lower rates of a short-term fixed-rate mortgage are worth the associated costs of having to remortgage more often.

What if I Move House During the Mortgage Period?

If there's a possibility that you’ll move house during the mortgage period, a shorter-term fixed-rate mortgage may be preferable.

Porting a longer-term fixed-rate mortgage to the new property or exiting the mortgage early may attract additional costs.

What if I Want to Take a 30-Year Fixed-Rate Mortgage?

You can take a 30-year fixed-rate mortgage, but while it might sound like a good deal to have a fixed rate over a very long time, there are some things to consider.

Have a look:

• If there’s a significant period when the Bank of England's interest rate is lower than your fixed rate, you’re going to lose out.
• The interest you'll be paying over 30 years is higher than for a shorter-term fixed-rate mortgage.
• Mortgage lenders may have age restrictions on longer terms. For example, if there's an age limit of 75, you'll not be able to take out a 30-year fixed-term mortgage if you're older than 45.
• You will incur penalties if you need to exit your contract early.

On the plus side…

You know exactly what your repayment is every month.

There are fees associated with each new mortgage agreement.

You're eliminating those costs by taking out a long-term fixed-rate mortgage.

What’s Involved in Applying for a Fixed-Rate Mortgage?

There are several steps involved in applying for a fixed-rate mortgage, from figuring out how much you can borrow to doing that all-important paperwork.

Get an Agreement in Principle

An Agreement in Principle (AiP)³ is the initial step to determining how much you can borrow to buy or remortgage a home.

There's no obligation or commitment to obtaining an AiP, and it's only an indicator of the amount you'll qualify for.

For a realistic AiP, make sure you provide accurate information.

How Much Can I Borrow?

How much you can borrow depends on how much the lender deems you can afford based on the joint income and expenditure of all the parties applying for the loan.

What Size Deposit Do I Need?

The lender usually requires a deposit, which can be anything from 5% of the value of the property.⁴

Remember, a larger deposit equates to a larger loan.

Consideration is also given to your profession(s), certain high-paying occupations - e.g. doctors or solicitors will qualify for a larger mortgage.

What Paperwork Do I Need?

The paperwork you will need when applying for a fixed-rate mortgage includes the following:

• Photo IDs of all the parties applying
• Proof of address no older than 3 months (bank statement or a utilities bill)
• Proof of income
• A building insurance policy, if you’re remortgaging from another institution
• Credit account statements - credit cards, car finance, loans or overdrafts
• Paperwork for any other mortgages you may hold
• The prospective property's details
• Solicitor’s details
• Estate agent’s or seller’s details, so the surveyor can view the property

How Do I Get the Best Fixed-Rate Mortgage Deal?

There are some ways to improve your risk profile to help you get the best fixed-rate mortgage deal.

This ranges from improving your credit score and doing your research to saving for the biggest deposit possible.

Work on Your Credit Score

A good credit score will positively affect the amount you can borrow.

You can do this by:

• Registering to vote.
• Paying your accounts on time.
• Making sure you don’t exceed the limits on your existing credit facilities.
• Closing stagnant credit accounts.
• Settling any county court judgements (CCJs) as quickly as you can.
• Correcting any errors on your credit report.

Compare a Broad Range of Lenders

Do your research across a broad range of lenders to find the fixed-rate mortgage deal that'll work best for you.

Build as Big a Deposit as Possible

The size of the deposit you can put down will influence the amount of money you can borrow.

Most lending institutions insist on at least 10% of the value of the property.

There are save-to-buy plans available to help you build a deposit.

Make Sure the Deal Meets Your Needs

You may be swayed by the low interest rate on offer, but it’s advisable to look at the other underlying costs that will impact your loan, such as upfront and early exit fees.

What Are the Costs Attached to a Fixed-Rate Mortgage?

The costs attached to a fixed-rate mortgage include:

• The amount you want to borrow will affect the cost of your fixed-rate mortgage.
• If you have a number of short-term fixed-rate mortgages (e.g. 5 x 5-year fixed-rate mortgage agreements) within the full term of your mortgage agreement (e.g. 25 years), there are going to be cost implications every time your remortgage, which will affect the overall cost of your mortgage.

Which Is Best, a Repayment or an Interest-Only Mortgage?

Deciding whether to take a repayment or an interest-only mortgage depends on your personal circumstances.

With a repayment mortgage, you’ll pay a larger amount every month, covering the interest on the loan and a percentage of the capital amount, so that your mortgage is paid in full by the end of your term.

Your monthly payments are lower with an interest-only mortgage because you’re only paying interest on the amount borrowed.

However

You will still owe the original capital amount of the loan at the end of the term, which you'll need to settle by securing more financing.

These are the additional administrative costs for taking out the mortgage, such as legal fees and any stamp duty.

Common Questions

In Conclusion

There are advantages to a fixed-rate mortgage, as well as downsides.

Take the time to consider your current needs and how they may change in the future before committing to the term of your loan.

The biggest financial decision you'll make is buying a house, so speak to the experts.

Consulting a mortgage broker or doing your own online research will help you make a more informed decision about your fixed-rate mortgage.