5-Year Fixed Rate Mortgages

For those looking for consistency in their mortgage payments, taking out a fixed-rate mortgage may be the best decision for you.

Read on to find out how these mortgages work.

What is a Fixed Rate Mortgage?

Fixing your mortgage for a set period (in this case, 5 years) means that you will pay the same rate for your mortgage, per month, until the five years is up.

Mortgages are made up of capital and interest. The capital portion of a mortgage represents the money you borrow to buy the property and the interest represents the cost of your loan. Lenders have their own standard variable rate of interest for mortgages, but for those on a fixed rate deal, the interest charge remains the same.

Applying for a fixed-rate mortgage requires careful planning, as you want to make sure that you can afford to pay the same every month, for the five-year period.

Am I Eligible for a Fixed Rate Mortgage?

  • Fixed-rate mortgages are available to those 18 years and over, as is the case with the vast majority of lenders. There is no upper limit in age for taking out a fixed rate mortgage, this will vary depending on the lender’s eligibility criteria.
  • You will need to pass your provider’s credit check. Every lender has their own system for deciding who is eligible for their mortgage products. Read our Guide to Improving your Credit Rating to find out more.
  • Your household income will also be checked and assessed, in line with the lender’s affordability criteria.
  • You will need savings to place as a deposit on a property. This will be a percentage of the amount of the property’s asking price.
  • These mortgages are available to those who have a right to live and work in the UK.

How is a Fixed Rate Mortgage Repaid?

Fixed periods are offered as an incentive to potential mortgage borrowers. With these deals, you are agreeing to pay a certain amount towards both the loan capital and interest, for the duration of the fixed period.  When making your application however, you are signing up for the entirety of the mortgage loan to be paid off within 25 years (although it is possible to get 30 and 20-year mortgages).

At the end of your five-year fixed incentive period, your interest rate will be changed to the lender’s standard variable rate, which is subject to fluctuation.  At this point, you may decide to remortgage, either with the same lender or a different bank or building society.   

Switching your fixed rate mortgage deal within the incentive period may incur early repayment penalties. Take a look at our Guide to Applying for your First Mortgage, to find out more about the costs of taking out a mortgage loan.

What are the Benefits of a Fixed Rate Mortgage?

  • Surety- With a fixed rate mortgage, you will have peace of mind. Your mortgage payments will stay the same. For those on lower incomes, who need to manage their household budgets carefully, fixed rate deals offer security.
  • Port Your Mortgage – Many fixed rate mortgage lenders allow their customers to transfer the mortgage to a new property, should you decide to move. The lender may have to re-assess your mortgage application in order for you to do this.
  • Good Deals out there – If you have a good credit score, you may be able to find a fixed rate deal with a low rate of interest charged.

Let’s Look at a Five Year Fixed Rate Mortgage Example:

Alan and Beth are looking to remortgage, as they have seen that the Bank of England base rate is at an all-time low. Beth anticipates that interest rates may rise soon, so the couple are looking to lock into a good rate now, so that they have reassurance in their payments for the next five years. They have found a similar low-interest rate mortgage, with a two-year fixed period and a cheaper arrangement fee. However, Alan and Beth opt for the more expensive set-up of a five-year fixed rate mortgage, as they worry about their mortgage affordability over the coming years.

What are the Pitfalls of a Fixed Rate Mortgage?

  • Better Deals Out There – With tracker and capped rate mortgages, when the Bank of England base interest rate falls, your mortgage payments get cheaper. When you are locked into a fixed rate deal, your mortgage payments stay the same.
  • Early Exit Fees – Early repayment penalties are often imposed on customers who wish to exit their fixed rate deal early. Then there is the cost of taking out a new mortgage, should you decide to switch.
  • High Set-up Costs – The arrangement fees of taking on a fixed term mortgage may run into the thousands. The security of your monthly payments, will in many cases, come at a premium.
  • Auto-Transfer to Lender’s SVR – At the end of the five-year period, it is likely that your lender will start to charge you their Standard Variable Rate of interest, per month. In some cases, this rate may be considerably higher than what you are currently budgeting for. The date the fixed period ends can be found in your mortgage contract and you may want to plan to apply for a new deal, with a new lender. If this is the case, you will need to plan ahead of time, to make sure you are not caught short.

What are the Alternatives to Fixed Rate Mortgages?

  • Tracker Mortgages – A mortgage that tracks the Bank of England base rate is known as a tracker mortgage. These are good for borrowers who wish to pay less for their mortgage, while interest rates are low. However, if the base rate rises, so will your mortgage repayments. So, think carefully about affordability and your monthly budget, if you wish to apply for a mortgage of this type.
  • Capped Mortgage – Mortgages with a ‘cap’ mean that you will never pay more in interest than a pre-determined percentage. Should the Bank of England lower their interest rates, you will benefit from making lower monthly mortgage payments.

If you would like some help choosing the right mortgage for your needs, get in touch with an independent mortgage advisor today. They offer free, no-obligation quotes.

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