Whether you’re taking out a brand-new mortgage or looking to change from your current deal, deciding whether or not to fix your mortgage rate is an important decision.
What is a mortgage rate?
When mortgage lenders talk about mortgage rates, they’re specifically talking about the interest rates you’ll be charged on your home loan.
The deal you choose will determine how much interest will be added to your loan, which in turn impacts your monthly repayments.
The type of deal you choose may also include other terms and conditions that apply when borrowing money, such as whether you can pay off your loan before the deal ends without incurring an early repayment charge.
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The different types of mortgage deals
A good starting point is to take a look at the types of mortgage deals available in the mortgage market.
Typically, there are three main types of mortgage deal for you to choose from:
- Fixed-rate mortgage
- Variable-rate mortgage
- Tracker mortgage
The type of mortgage you need will greatly depend on your personal circumstances. Read about the different types of deals in more detail below.
How does a fixed-rate mortgage work?
Fixed-rate mortgages do what they say on the tin: your mortgage rate remains fixed for a pre-defined period, meaning your monthly mortgage payments are too.
A lender cannot change the interest rate on a fixed-rate mortgage, meaning you’ll know exactly what you’ll pay each month while the deal is in effect.
Most lenders offer fixed-rate mortgages, even if it’s just for an incentive period. You might find a deal offering you something like a two-year fixed-rate mortgage at 2%, exclusively for first-time buyers.
Different lengths of time for fixed rates
Fixed-rate mortgage deals rarely, if ever, last for the whole term of a mortgage.
Generally, you can find a fixed-rate mortgage deal lasting for two, five, seven, or ten years. In some cases, you may even be able to find deals that offer a fixed-rate period of up to 10 or even 15 years.
Pros of fixed-rate mortgages
- Certainty of knowing how much your monthly repayments will be.
- Your lender can’t change your rate before the end of the fixed-rate period.
- Your payments won’t rise if general interest rates rise.
Cons of fixed-rate mortgages
- You may have to pay early repayment charges if you want to pay more than your normal monthly repayment.
- Your mortgage payments will not fall, no matter what happens to interest rates in general.
How does a variable-rate mortgage work?
A variable-rate mortgage charges interest on your loan just like a fixed-rate mortgage. But, instead of having a fixed interest rate, your payments will be linked to the lender’s standard variable rate (SVR).
A lender can change their SVR whenever they want, usually in response to what’s happening across the mortgage market.
That means your monthly payments will depend on what the SVR is at that time.
Each bank and building society sets their own SVR, and it will vary from lender to lender.
Often, lenders move you to their standard variable rate when your tracker- or fixed-rate deal ends.
Pros of variable-rate mortgages
- Could save you money if the variable rate is particularly low.
- You could benefit from lower repayments if interest rates were to fall.
- If you’re on your lender’s SVR there typically won’t be any early repayment charges. This gives you the flexibility to make lump sum repayments at any time.
Cons of variable-rate mortgages
- Uncertainty from changing rates – you will likely pay more if interest rates rise.
- There may be early repayment charges if you want to pay off the mortgage early.
- A mortgage lender can change the rate at any time without notice.
How does a tracker mortgage work?
Tracker mortgages work in almost exactly the same way as variable-rate mortgages. The difference is that they follow the movement of the Bank of England (BoE) base rate.
The base rate is essentially England’s official borrowing rate. As of July 2021, the base rate is at a record low of 0.1%.
If your mortgage deal was a tracker, it will change as and when the BoE changes the base rate.
If the base rate goes up, your repayments will rise. If it falls, your mortgage will typically become cheaper.
However, some tracker mortgages have a “collar” that they won’t fall below. This could stop you from saving as much as you might think.
Pros of tracker mortgages
- Potentially lower interest rates.
- You’ll pay less if interest rates fall.
- Sometimes tracker deals have no early repayment charges, giving you the flexibility to make additional payments if you wanted to.
Cons of tracker mortgages
- The interest rate could become considerably higher if the base rate rises.
- The “collar” might eat into the savings you can make when interest rates are low.
How do I pick the right mortgage deal for me?
In essence, the right deal depends on your personal circumstances. A fixed-rate mortgage will work for some, while others might prefer a tracker- or variable-rate option.
Fixed-rate mortgage deals offer the security of fixed monthly repayments
Fixed-rate mortgages can be great if you need certainty.
You’ll know how much your mortgage repayments will be for a fixed period and there are few surprises. Even if interest rates rise, you’ll be protected from having to make higher payments.
Fixed-rate mortgages can be a great option if you’re working to a budget, and you need to know exactly what you’re going to pay for a few years.
The downside is that, if you want to pay off some or all of your mortgage, you might be subject to an early repayment charge.
And, if interest rates fall, your mortgage rate (and your repayments) won’t fall accordingly. You could therefore end up paying more than you need to.
Is a tracker or lender’s standard variable rate better for me?
Meanwhile, variable-rate mortgages or tracker mortgages can be good in certain environments.
When the base rate is low, you can often save money. And the added flexibility often associated with these deals can be useful.
The base rate is currently at a historic low, meaning interest rates are low. However, if interest rates rise, you could end up paying more – and this might squeeze your monthly budget.
If you’re currently on your lender’s SVR, it might be worth speaking to an expert to see if you can find a better deal.
A lender’s SVR will often be higher than many of the other deals available in the market. Shopping around for an alternative could save you money.
What could happen to mortgage rates in 2021?
Right now, interest rates are at the lowest they’ve ever been.
As a result, many variable- and tracker-rate mortgage holders will have been enjoying lower monthly payments than usual.
However, this doesn’t mean rates will definitely continue at this level.
It’s impossible to predict exactly what will happen to these rates moving forward. Currently, many experts seem to think rates will stay the same for the time being.
Similarly, in the Guardian, David Hollingworth of mortgage broker L&C pointed to how a competitive market has driven down prices.
The range of lower-rate deals currently in the market shows “how low mortgage rates actually are at the moment,” he said.
In fact, there’s still room for mortgage rates to fall even further.
In October 2020, the Bank of England asked financial institutions how prepared they would be for negative interest rates to come into effect. This would mean banks and building societies being charged for holding their money with the Bank of England.
For mortgages, negative interest rates could mean mortgage rates falling to 0% or below. That would mean no interest charged on monthly repayments, or even interest being taken off the total of a mortgage loan each month, rather than added on.
If this did happen, variable- and tracker-rate mortgage holders would save even more each month, while fixed-rates would not benefit.
So, should you fix your mortgage?
Ultimately, the decision to fix your mortgage comes down entirely to your personal circumstances.
Do you need certainty in what your monthly repayments will be? Or would you rather capitalise on the low-interest environment with a variable- or tracker-rate, even if it could see your repayments rise later?
It’s important to remember that it’s not just about your mortgage rate, either. While rates may be low, lenders could add product or admin fees to the deal you want to take.
Furthermore, any fixed-rate a lender offers you will always depend on all sorts of factors, such as how much you want to borrow, and what your credit history is like.
That’s why the kind of deal you need will depend on you, rather than on mortgage rates directly.
Working with a mortgage advisor
A mortgage advisor can be indispensable in helping you work out what you need.
Mortgage advisors can find the right mortgage for you, whether that means a more flexible arrangement or just a better deal overall.
A mortgage advisor can work out the cost of a range of different deals, taking the interest rates and fees into account, to establish which is the most appropriate product for you.
Many also have excellent knowledge of lender criteria. They will know which lenders are likely to agree your mortgage application – for example, if you’re self-employed, you have previous credit issues, or your income is irregular.
They will take all your personal circumstances into account and find a lender who can assist.
A professional mortgage advisor may also have access to mortgage deals that are only available through working with them.
To speak to an advisor, try our search tool to find a local financial advisor in your area.
This article does not constitute financial advice. Do not act on anything you read in this article.
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Antonia is the Financial Editor at InvestingReviews.co.uk and brings a wealth of experience, having written for various industries over the past 10 years.
Her investment platform reviews, news, blogs and guides are meticulously researched, fact checked, and updated on a regular basis.