It’s a common question that we often get asked and while the correct answer depends upon your circumstances, here are some of the key considerations that you need to consider when you are deciding whether to get a fixed rate.

History

Interest rates have been at an all-time low for years. This is usually the reason why people want a fixed-rate – fix whilst the rates are low. However, on 16^th December 2021 the Bank of England began to increase the base rate from 0.10% to where it currently stands today at 1.25%. These are the first increases since August 2018 and will likely increase the interest rates on fixed-rate products offered by lenders who obtain their capital from inter-bank rates which are directly related to the Bank of England base rate.

Personal Circumstances

Having a fixed interest rate protects you from any rises in variable rates for the duration of the fixed term whilst giving you consistency in your mortgage repayments which could be a key priority for you as mortgage repayments are often the largest monthly expenditure for a household. Your short-term plans and goals should be considered and there should be some deliberation on which mortgage product would be suitable for your plans. For example, if you were looking to move house in two years and you had a five-year fixed rate mortgage – you may be subject to early repayment charges if your mortgage is not portable.

Portability and Early Repayment Charges

If the mortgage is not portable and you were to sell your home within the initial fixed term, you would incur early repayment charges when you repay the mortgage following the sale of your house. These charges are usually between 1% and 5% of the outstanding mortgage debt and usually decrease each year of the fixed term duration. For example, if you were to repay a £200,000.00 mortgage during the second year of a five-year fixed term then you may have to pay a 4.00% early repayment charge which could be £8,000.00 as well as the other mandatory fees associated with moving house.

Most mortgage products offer portability which provides the option of being able to transfer your existing mortgage to a new property subject to the lender’s current underwriting criteria. This may result in not having to pay any early repayment charges when you move home, however you are restricted to your existing lenders’ products and underwriting criteria at that time which may not be the most competitive or even mean being able to borrow less than with an alternative lender with different affordability metrics.

Product Fees

The majority of fixed-rate mortgages have an arrangement/product fee as the fixed rate offered can be lower than the lenders’ variable interest rates. Although a fee may be payable this can still have a lower total cost compared with adding the fee to the loan. By way of example, a £250,000.00 mortgage with a fixed interest rate of 2.40% would have £28,480.45 interest payable over 5 years. However, if you were to add a £999.00 product fee to the loan to get a lower interest rate of 2.15% you would pay less interest over the 5-year term (£24,806.86) interest over 5 years. In this example, you can see that even with the fee added to the loan, the interest paid is £3,673.59 less due to the lower interest rate obtained. You can often add these product fees onto your overall mortgage however it is important to remember that you will be charged interest on this amount through the mortgage term.

To summarise, there are many different aspects to consider when deciding whether to get a fixed-rate mortgage, at PJL Financial Services Limited, we can support you in understanding the most suitable option based on your own individual personal circumstances. If you would like to learn more about this subject or require Independent Financial Advice from our local, experienced and friendly team, please feel free to contact us on 01788 57 11 22.

The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. It does not constitute advice. All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor. 

PJL Financial Services Limited are authorised and regulated by the Financial Conduct Authority. 

Your home may be at risk if you do not keep up repayments or other loans secured against it.