What Does Fixed Versus Variable Mean On A Mortgage?
There are generally two types of mortgages - Fixed rate mortgages and Variable rate mortgages.
With a fixed rate mortgage, the interest rate is fixed for a certain period and then at the end of that period, it reverts to a variable rate mortgage. A fixed rate is considered lower risk as your interest rate and monthly payments are locked in for a certain period.
With a variable rate mortgage, the interest rate varies as and when the Bank of England decides to change their interest rate. This is considered higher risk as your interest rate could increase with little warning, making monthly repayments more expensive.
How Long Are Mortgages Fixed?
Most fixed rate mortgages are set for the first two, three or five years of the term. The mortgage reverts to a variable rate at the end of the fixed period. Most people will renegotiate their mortgage towards the end of the term so they don’t fall into a variable rate. A mortgage term in the UK is typically 25 years, although it can vary depending on your property and the circumstances surrounding the purchase.
A few lenders offer ten-year fixed rate mortgages and occasionally fixed terms of 15 or 40 years.
The term the loan is fixed for is determined by several factors, including your short-term intentions. For example, if you intend to move in approximately two years, your broker may advise you to take out a two- or three-year fixed mortgage.
When you are approaching the end of the fixed rate period, most lenders will offer you a new fixed rate deal or allow you to revert to their variable rate.
Advantages of Fixed Rate Mortgages
The biggest advantage of a fixed rate mortgage is that you know exactly what your mortgage repayment will be for that period, usually a two-year fixed, three-year fixed or five-year fixed.
It makes budgeting easy because the mortgage repayment won’t change for the term.
If you are a first-time buyer, it is worth considering the pros and cons of fixed mortgages and variable mortgages. You might like the idea that your mortgage repayment won't change for the first few years of your mortgage, allowing you to furnish your home or make future plans without the worry of your mortgage repayments increasing.
Disadvantage Of Fixed Rate Mortgages
One disadvantage of fixed rate mortgages is that if interest rates fall, you still pay the same monthly payments because your interest rate and payments are fixed for a pre-determined period.
Another disadvantage is that most lenders charge an early repayment fee if you repay your mortgage during the fixed rate period. For example, a lender may charge a 2% penalty, meaning that if you had borrowed £300,000 and repaid the mortgage during the fixed period, you would be charged an early repayment charge (ERC) of £6,000.
Some lenders charge high arrangement fees on their fixed rate products.
All fees should be brought to your attention and shown on the mortgage illustration your mortgage broker provides.
Remember that your home may be repossessed regardless of your mortgage type if you can’t meet the monthly repayments. The repayments are vital whether you take out a lender’s standard variable rate or any fixed rate mortgage.
Advantage Of Variable Rate Mortgages
It's worth considering the advantages and disadvantages of a variable rate versus a fixed rate mortgage product.
Variable rate mortgages can be more flexible since they generally don’t carry any early repayment penalties (ERCs).
You can also usually switch mortgage products without paying a penalty.
Disadvantages of Variable Rate Mortgages
The biggest concern with variable rate mortgages is that your repayment will increase if interest rates rise. Since Covid, rates have increased significantly. We’re in a period of well-documented economic uncertainty, which has had a noticeable impact on mortgage rates.
As an example,
If you had a 1% variable base rate tracker interest-only mortgage in June 2022 of £200,000, the monthly repayment would have been £375.00. The Bank of England rate in June 2022 was 1.25%. (A base rate tracker mortgage tracks the Bank of England base rate, with an added percentage on top).
Fast forward to today (September 2023), the Bank of England rate stands at 5.25%, and the mortgage repayment would be £1042.67
In just over a year, this represents an increase in repayments of £667.67 per month, which is a huge amount. This jump could hit you hard, especially if it’s not budgeted for and your income means you will struggle to meet repayments.
Can You Get A Fixed Rate On a Buy-to-Let Property?
Most Buy-to-Let lenders offer fixed rate mortgages again with fixed periods typically of two years, three years and five years. Rates are higher for buy-to-let mortgages than traditional residential mortgages because they are considered higher risk.
If you own a home and have a buy-to-let investment property, you are much more likely to pay your residential mortgage if times get tricky.
Arrangement fees on buy-to-let mortgages are generally higher than those on standard residential mortgages.
How Many Fixed Rate Mortgages Are There?
UK Finance reports that of the 8 million plus mortgages in the UK today, approx 80% of them are fixed rate mortgages, i.e. approx 6.4 million.
This is a strong indicator that borrowers like the comfort of knowing their mortgage repayment will remain the same for a certain period. At the end of the fixed rate period, most lenders will offer the client another fixed rate product, enabling them to budget carefully for a further period.
Second Mortgage Fixed Rate Mortgages
There are fixed rate mortgages available in the second mortgage sector. A second mortgage is also known as a secured loan, homeowner loan or second charge mortgage.
To qualify for a second mortgage, you must already have a mortgage secured against the property on which you want to take out the second mortgage. Many people already have a mortgage secured against their property, most of whom will have needed a mortgage to buy their property.
Like mortgages in the first mortgage market, second mortgage lenders also offer fixed rates of two, three, and five years. Also, early repayment charges (ERCs) apply with second mortgages.
A qualified mortgage broker will consider all of your personal circumstances when assessing whether a fixed rate or variable rate mortgage is best for you. They will consider your attitude towards risk and your short, medium and long-term plans.
As with all mortgages, the higher your credit score, the better the terms you will be offered. You are likely to pay a higher rate if you have a low credit score.
In order to obtain the most competitive terms for a second-charge mortgage, there are numerous online calculators or comparison sites for borrowers to look at.
Another option is to speak to a specialist mortgage broker who understands the second mortgage market well. A professional broker will have relationships with many second-charge lenders, allowing them to obtain the best possible terms, whether you require a fixed or variable rate loan.
For more information and confidential advice, speak to our team at The Second Mortgage Company.