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A fixed rate mortgage locks your interest rate — and therefore your monthly payment — for a set period, regardless of what happens to interest rates in the wider economy. They’re the most popular mortgage type in the UK, accounting for roughly 90% of new mortgages.
How a Fixed Rate Mortgage Works
When you take out a fixed rate mortgage, the lender agrees to charge the same interest rate for a specified period — typically 2, 3, 5, or 10 years. Your monthly payment stays the same throughout this period.
At the end of the fixed period, your mortgage automatically moves to the lender’s Standard Variable Rate (SVR), which is typically significantly higher and can change at any time. Most borrowers remortgage to a new deal before this happens.
Fixed Rate vs Variable Rate
Fixed rate: Same monthly payment for the fixed period. Predictable. You’re protected if rates rise, but don’t benefit if rates fall.
Standard Variable Rate (SVR): The lender’s default rate, which they can change at any time. Currently typically 7–8% at major lenders — significantly higher than most fixed deals. Nobody should stay on SVR long-term.
Tracker mortgage: An interest rate that moves in line with the Bank of England base rate (e.g. base rate + 1%). Cheaper than fixed when rates are falling or stable; rises when the base rate rises. Some trackers have no early repayment charges, making them flexible.
Common Fixed Rate Terms
2-year fix: Lower initial rate (typically), but requires remortgaging again in 2 years. Two rounds of product fees and administrative work in 4 years. Good if you expect rates to fall and want to benefit from a new (potentially lower) deal soon.
5-year fix: More popular in recent years. Higher rate than a 2-year fix typically, but provides certainty for longer and reduces remortgaging frequency. Good if you value payment stability.
10-year fix: Locks you in for a decade. Very rare in the UK. Best if you’re certain you’ll stay in the property for a long time and want maximum certainty — but early repayment charges if you need to leave are significant.
Early Repayment Charges (ERCs)
The trade-off for a fixed rate is that locking in usually comes with Early Repayment Charges (ERCs). If you want to exit the fixed rate before it ends — to remortgage to a lower rate, sell, or overpay above the allowed limit — you pay a penalty.
ERCs are typically 1–5% of the outstanding mortgage balance, declining each year of the fixed period. On a £200,000 mortgage with a 3% ERC, that’s £6,000 — a significant sum.
Before taking a fixed rate, consider:
– How likely are you to move house within the fixed period?
– Will you want to overpay significantly? (Most fixed rate mortgages allow up to 10% overpayment per year without penalty)
How to Choose the Right Fixed Rate
2-year vs 5-year: The decision depends on your view of future interest rates, your plans to move, and how much you value payment certainty. There’s no universally correct answer — financial commentators have been wrong about rate direction repeatedly.
Practical factors:
– If you’re planning to sell in 3–4 years, a 2-year fix avoids the ERC of a 5-year fix
– If you want certainty and don’t plan to move, a 5-year fix is typically cleaner
– If rates are expected to fall significantly, a 2-year fix lets you capture that benefit sooner
What Affects the Rate You’re Offered?
Loan-to-Value (LTV): The most significant factor. The lower your LTV (i.e. the bigger your deposit or equity in the property), the lower the rate:
– 95% LTV: Highest rates — small deposit, high risk to lender
– 75% LTV: Substantially lower rates
– 60% LTV: The best available rates at most lenders
Credit score: A clean credit history qualifies you for the best rates. Defaults, CCJs, or missed payments will result in higher rates or rejection.
Mortgage type: BTL mortgages, and mortgages for non-standard properties, are priced differently from standard residential mortgages.
How to Get the Best Fixed Rate
Use a mortgage broker: Brokers have access to the whole market (including products not available directly to the public) and can compare thousands of deals simultaneously. The best route for most borrowers — particularly first-time buyers and those with any complexity in their situation.
Start early: Fixed rate deals can be reserved up to 6 months before completion. If rates rise while you’re buying, you don’t lose the deal. If rates fall, most brokers will monitor and switch you to a better deal.
Consider total cost, not just rate: A low rate with a £2,000 arrangement fee may cost more over 2 years than a slightly higher rate with a £500 fee, depending on mortgage size.
What Happens When Your Fixed Rate Ends?
At the end of the fixed period, you should remortgage rather than letting the mortgage fall to the SVR. SVR rates are typically 2–4% higher than available fixed rate deals.
Start the remortgage process 3–6 months before your fixed rate expires — most deals can be locked in early. Your existing lender may offer a product transfer (a new deal without a full remortgage application) which is quicker and simpler than switching lender, though switching lender may offer better rates.
Summary
Fixed rate mortgages provide payment certainty for a set period:
- The rate and monthly payment don’t change during the fixed period — you’re protected from rate rises
- 2 and 5-year fixes are the most common — choose based on your plans to move and view of future rates
- Early Repayment Charges apply if you exit early — check these before committing, especially if you might move
- Remortgage before the fixed period ends — SVR rates are significantly higher; most borrowers remortgage at the 2–3 month mark before expiry
- Use a mortgage broker — access to the whole market and expert rate comparison is worth the small additional step
Next read: What is mortgage overpayment and is it worth it? | https://moneyunpacked.com/what-is-mortgage-overpayment-and-is-it-worth-it/