As we get into 2024, the base rate in the UK is at its highest point in many years. Average mortgage rates are also relatively high, but they have been steadily decreasing for the past six months or so. Despite this downward trend, the Bank of England has recently stated that they are unlikely to decrease the base rate in the foreseeable future, and therefore, mortgage rates aren’t expected to come down much further any time soon.
With so much volatility in the mortgage market in recent years, you may be wondering whether you should fix your mortgage for 2, 5 or 10 years, or whether you should look at other options such as tracker mortgages. In this guide, we’ll explain what fixed-rate mortgages are, the suitability of fixing your mortgage for 2, 5 or 10 years, and what you need to know to make the right decision.
What is a Fixed-rate Mortgage?
Fixed-rate mortgages are the most common type of mortgage product in the UK because they provide predictability and stability. With these mortgages, the interest rate remains the same for a fixed period of time, usually 2, 5 or 10 years. This means that your monthly payments will also stay the same, regardless of whether interest rates rise or fall.
To get the lowest fixed rates, you may have to pay a product fee. Whether you should pay a product fee for a better deal mostly depends on the size of your loan. Our friendly advisors will be able to search the market and do some calculations to work out which fixed-rate deal is right for your situation.
At the end of a fixed-rate period, your lender will typically move you onto their highest rate, known as the Standard Variable Rate (SVR). This is why it’s recommended to remortgage to a new fixed-rate deal in the months leading up to your end date, so you don’t pay more interest than you need to.
The Benefits & Drawbacks of a Fixed-rate Mortgage
Before we talk more about who should get a fixed-rate mortgage, let’s have a look at the benefits and drawbacks of these products.
Benefits of a Fixed-rate Mortgage:
- Protection from rising interest rates. If interest rates rise, your monthly payment will stay the same. This can help you save money if rates increase significantly.
- Predictable monthly payments. You’ll know exactly how much your mortgage payment will be each month, which can help you budget and plan for the future.
- Peace of mind. Knowing that your monthly repayments won’t increase can give you peace of mind and help you feel more secure in your home.
Drawbacks of a Fixed-rate Mortgage:
- Potential to pay more than current rates. If interest rates fall, you’ll be locked into a higher rate until your fixed-rate period ends, which could mean that you’re paying more than you need to. You’ll usually be able to switch early but you may have to pay an Early Repayment Charge, which we’ll discuss further in a moment.
Should I Get a Fixed-rate Mortgage?
As you can tell by looking at the benefits of fixed-rate mortgages above, you may be advised to fix your mortgage if you:
- Want predictable monthly payments for a specific period of time to allow you to budget confidently.
- Are concerned about rising interest rates in the future and how they may affect your financial situation.
- Value stability and peace of mind over the potential to save a bit of money if rates were to fall during your fixed-rate period.
In the current climate, the general recommendation is to get a fixed-rate mortgage, but be sure to talk to an advisor to see if this applies to your situation. The reason this is the general recommendation is to protect mortgage holders from the risk of further rate increases in the future. As mortgage rates and inflation are already relatively high compared to recent years, if something were to push these higher in the years to come, the resulting monthly repayments could be too high for some homeowners to cope with. A fixed-rate mortgage would protect against any further rises for as long as the fixed-rate period is set for. So how long should you fix your mortgage for? Let’s discuss this further in the next section.
How Long Should I Fix My Mortgage For?
How long you should fix your mortgage for depends on a number of factors. It’s important to speak to a mortgage broker to discuss your specific situation before deciding to take out a mortgage to ensure you make the right choice. There are three key questions a mortgage advisor will seek to answer before offering their recommendation. Let’s take a look at these three questions below.
1. How long do you plan to live in the property? It’s a good idea to start by thinking about when you’re likely to move house in the future. Having a fixed-rate mortgage doesn’t necessarily lock you into a property, but you may have to pay an Early Repayment Charge to switch to a new deal before your fixed-rate period ends. Having said that, some lenders allow you to port, or transfer, your mortgage to a new property, but there may be a charge for this in some cases.
2. What is happening now in the mortgage market and what’s predicted to happen in the future? Your mortgage advisor will understand the current state of the market and they’ll also have a fairly good idea of what’s likely to happen in the near future. Mortgage rates are mostly affected by the Bank of England’s base rate, which in turn, is affected by inflation and the state of the economy. Another influencing factor is swap rates, which your advisor should also have a firm understanding of. No one can predict the future with complete certainty, but being industry experts, mortgage brokers will have a better understanding than most.
3. Could you cope financially if rates were to rise and what’s your tolerance to risk? If today’s rates are at the upper end of what you can afford to pay month to month, then your advisor may suggest fixing for a longer period of time. This is to protect your family and your home if rates were to rise in the future. However, if you could cope with higher rates and your comfortable taking that risk if it means potentially saving some money if rates were to fall, then your advisor may suggest fixing for a shorter term.
What is an Early Repayment Charge?
An Early Repayment Charge (ERC) is a fee that you may have to pay if you want to remortgage before the end of your fixed-rate period. It is typically worked out as 1-5% of your remaining mortgage balance depending on how close you are to the end of your deal. For example, if you have a 5-year fixed-rate deal and you decide to switch to a new mortgage 2 years before the end date, you may have to pay an ERC of around 2% of your remaining loan. Your mortgage broker will be able to explain the ERC structure of your specific deal before you commit so you fully understand the implications. If you decide to remortgage at the end of your fixed-rate period, there won’t be an ERC to pay. To learn more about ERCs, please read our guide, ‘What is an Early Repayment Charge and When Do I Have to Pay It?‘.
Should I Get a 2 or 5-year Fixed-rate Mortgage?
Whether you should get a 2-year fixed-rate mortgage or a 5-year fixed-rate mortgage depends on your specific circumstances. Fixing for 2 years will give you certainty for a relatively short period of time, but it will also give you more flexibility. If rates were to drop, you may be able to switch to a better deal in 2 years’ time without paying an ERC. However, if rates were to rise, you would likely have to remortgage to a higher rate in 2 years’ time. Future mortgage rates may be hard to predict, but if you’re planning on moving house in less than 5 years, then a 2, 3 or 4-year fixed-rate mortgage may be more suitable.
If you’re not planning on moving in the next 5 years, then you may want to consider a 5-year fixed-rate mortgage. Doing this will give you stability for a longer period of time and protect you from the possibility of rising rates. However, if rates were to fall, you may end up paying more interest than you would have done on a shorter term or you may have to pay an ERC to remortgage early. For some, being protected from potentially higher rates for a long period of time is more important than the potential to save money if rates were to fall.
The information above is just to give you an idea. To decide how long to fix your mortgage for, it’s important to speak to a mortgage advisor, who’ll have a better idea of the market predictions and other factors that’ll help you make the right choice.
Should I Get a 10-Year Fixed-rate Mortgage?
A 10-year fixed-rate mortgage could be the right option for you if you plan to stay in your home for a decade or more. It can also be the right choice if rates are expected to be volatile in the years ahead, but it’s difficult to predict rates that far into the future. Ultimately, fixing for 10 years can give you certainty and stability for a long time, but it will also make your mortgage situation less flexible. If rates drop considerably or you decide to move, you may need to pay an ERC and potentially an additional penalty if you decide to switch to a new deal.
A 10-year fixed-rate mortgage is a big commitment, so be sure to speak to an advisor before going down this route to explore your options and understand the implications of each.
The Bottom Line
In times of volatility in the mortgage market, choosing the right fixed-rate term has the potential to save you a lot of money. The main factors to consider when deciding how long to fix for are; how long you plan to stay in your property, what rates are available to you, and what mortgage rates are expected to do in the coming years. It’s important to speak to a mortgage expert who understands the market. Your advisor will discuss your situation and plans and then search the market to see what deals are suitable for you.
At Michael Usher Mortgage Services, we’ve been helping our local community for over 30 years! We’re not affiliated with any particular lender, so we can access a comprehensive range of mortgages from across the market to find a deal that suits your needs. We’ll guide you through the process and liaise with your lender, estate agent and solicitor to ensure your application goes as smoothly as possible, and we can also help to protect your mortgage with our FREE Insurance Service.
Talk to one of our friendly mortgage advisors for free to get going quickly. Our head office is on Frimley High Street, but we can also help you remotely via phone or video call if you’d prefer. We look forward to chatting with you!
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