Fixed Rate Mortgages Explained

What Is a Fixed Rate Mortgage?

A fixed rate mortgage is a home loan where the interest rate stays the same for a set period, typically two, three, five or ten years. During this time, your monthly repayments won't change, no matter what happens to the Bank of England base rate or your lender's standard variable rate (SVR).

Once the fixed period ends, you'll usually move onto your lender's SVR, which is almost always higher. That's why most borrowers choose to remortgage to a new fixed deal before their current one expires.

Fixed rate mortgages are by far the most popular choice among UK homeowners. According to UK Finance, around 75% of outstanding residential mortgages are on a fixed rate, reflecting the certainty and peace of mind they offer.

How Does a Fixed Rate Mortgage Work?

When you take out a fixed rate mortgage, your lender agrees to charge you a set interest rate for the duration of the deal. For example, if you fix at 4.5% for five years, you'll pay 4.5% interest on your outstanding balance every month for those five years.

Your monthly payment is calculated based on the fixed rate, the amount you've borrowed and the remaining mortgage term. Because the rate doesn't change, you'll pay exactly the same amount each month during the fixed period.

It's worth noting that while your interest rate is fixed, the split between how much of each payment goes towards interest and how much goes towards repaying the capital will shift over time. In the early years, a larger proportion covers interest, but as your balance reduces, more goes towards paying off the loan itself.

Advantages of Fixed Rate Mortgages

The biggest advantage is certainty. You know exactly what your mortgage will cost each month, making it far easier to budget and plan your finances. This is particularly valuable if you're on a tight budget or have recently stretched to buy a property.

Fixed rates also protect you from rising interest rates. If the Bank of England raises the base rate during your fixed period, your payments stay the same. This can save you a significant amount of money if rates rise sharply.

Lenders offer a wide range of fixed rate products, so there's plenty of competition in the market. This means you can often find competitive deals, especially if you have a good loan-to-value (LTV) ratio and a strong credit history.

Disadvantages of Fixed Rate Mortgages

The main downside is that if interest rates fall, you won't benefit. You'll continue paying the same fixed rate even if the base rate drops significantly. This means you could end up paying more than borrowers on variable or tracker deals.

Fixed rate mortgages often come with early repayment charges (ERCs). If you want to leave the deal before the fixed period ends, perhaps to remortgage or move house, you could face a penalty of between 1% and 5% of the outstanding balance. This can amount to thousands of pounds.

Fixed rates can also be slightly higher than the initial rates offered on some tracker or discount deals. Lenders charge a premium for the certainty a fixed rate provides, so you may pay a little more for the security of knowing your payments won't change.