Fixing your mortgage can give you peace of mind that your mortgage payments will remain the same for the length of your initial term. This can be very helpful when interest rates are expected to go up as it could save you a decent amount of money in interest payments, although there are a few drawbacks that you need to consider.
In this post I’ll go through various things to consider when deciding on how long to fix your mortgage for to make sure you make the right choice for you. There isn’t a one size fits all decision, a great saving for one person may cause significant costs for another.
Benefits of Fixing Your Mortgage
- Saving money by locking in a lower interest rate to protect against interest rate increases
- Peace of mind knowing exactly how much your monthly payments will be
- Easier to budget your household expenses
- Saving remortgage fees compared to choosing a shorter term
Drawbacks of Fixing Your Mortgage
- Penalties for leaving early – for example, moving home
- Not getting the benefits if you cross a loan to value threshold (explained below)
Loan To Value Ratio Considerations
When taking out a new mortgage, one of the main drivers of what interest rate a lender is willing to give you is your loan to value.
The loan to value ratio is a calculation based on how much money you want to borrow compared to the total value of the property. For example, a loan to value of 90% means you’re going to put down a 10% deposit and ask the lender for 90% of the money to buy the property.
The lower your loan to value ratio, the lower the risk to the lender that they’ll lose money in the event that something goes wrong, for example, if you stop paying your mortgage and they’re left with the property. As the lenders risk is reduced, they’re then willing to offer you a lower interest rate.
Lending providers usually work around certain thresholds where they’re willing to give you a better rate as your loan to value decreases. The biggest difference is going from 95% to 90% loan to value as that effective means you’re doubling your deposit from 5% to 10%. This benefit keeps going for each 5% loan to value decrease until around 60% loan to value where you start to reach the maximum benefit.
If you’re close to the next loan to value threshold, it may be worth researching the interest rate difference for both levels. Putting in an extra few thousand, or waiting to remortgage for a few months could give you a massive saving, especially if you’re looking to fix your mortgage for a long time.
Probability of Moving to a New Property
One of the downsides of fixing your mortgage for a long length of time is that there are usually penalties if you leave during the fixed term. If you’re considering moving to a new house within the next few years, it may be worth going for a shorter fixed term to give you more flexibility.
Some mortgage products may allow you to carry your mortgage over to new house, effectively keeping the same product and just paying a small fee to move it or if you need additional fund if you are buying a more expensive property. This could help save money when buying a new house so definitely worth it to check, or even look for that option within a new mortgage product if you think you may move within the next few years.
Is Now the Best Time to Fix Your Mortgage?
There is never a perfect time to fix your mortgage and everyone’s situation is different, however with a recent interest rate increase and the potential for more in the near future, now could be a good time to fix your mortgage.
One thing to remember about fixing your mortgage when expecting interest rates to rise is to not over extend yourself. Try and anticipate what the mortgage rates could be when you come to renew and make sure they’re still affordable and won’t put you in a painful financial situation.
When Are Interest Rates Likely to Rise?
The Bank of England has indicated that interest are expected to rise in the coming months with many analysis predicting the base rate could rise to 1% by the end of 2022.
Whilst this doesn’t seem like huge increase, especially to those that can remember interest rates being significantly higher in the past, one thing to remember is the percentage increase. With the base rate being lowered to just 0.1% due to the pandemic, if the interest rates were to rise to 1% that’s a 900% increase.
The interest rates have already been increased from the pandemic lows, however just make sure you factor in these expected increases so you don’t have any surprises later down the line when your fixed rate does come to an end.
To read more about why interest rates are going up and get the latest updates, here’s a link to a useful post on Bank of England site.
Is It Worth Breaking a Fixed Rate Mortgage?
With interest rates starting to increase more rate rises expected, it could be worth considering to ending your fixed term early.
Make sure to thoroughly read the fine print of your current mortgage and fully understand the implications of terminating early. Some products have quite painful termination fees, such as 1-3% of the current total borrowed amount which can quite quickly dwarf any expected savings from a lower interest rate.
However, some companies may allow you to break your fixed rate mortgage early in order to secure a new longer deal. For example, if you just have 1 year left of your fixed rate, they may be willing to cancel the penalties if you were to sign up to a 3 or more year mortgage to lock you in as a customer.
How To Find the Best Fixed Rate Mortgage Deals
When looking for the best mortgage deal, I prefer to leverage multiple options. At first I use one of the popular mortgage comparison sites that I’ve listed below to get an overall feel for the market. This involves changing various options including the loan to value ratios to understand the average changes in interest rates and make notes of the fees and best deals.
This has then given me the best mortgage deal that I can secure myself. I then contact a mortgage advisor and ask them if they can beat what I’ve found online including their fees.
If they can, usually by leveraging their connections with lenders, then brilliant. If they can’t then I know I’ve found a great deal online and avoid having to pay a mortgage advisor a significant sum to effectively match me to a product that can be found online in a few minutes.
For people with complicated situations, a mortgage advisor will probably be best route as they have the added benefit of proving advice. This can include if you have multiple properties you’re looking to combine into one mortgage, do an equity release or have a specific requirement such as no early repayment penalties.
Mortgage Trick to Hedge Against Rising Interest Rates
One potential trick to consider to help hedge against a future increase rate increase is to look for a mortgage now and get an offer that you can use at a later date. A lot of quotes are valid for up to 6 months from when they are initially offered which can be quite useful if you want to secure a lower rate now.
Just make sure you consider any credit score impacts as obtaining multiple quotes could hurt your credit score.
Longer-Term Fixed Year Mortgage – 15 to 40 Years
New products have recently been released from Kensington Mortgages and Habito allowing you to fix your mortgage for a significant length of time, including a 40 year fixed rate mortgage.
These do have a slightly higher rates, however gives certainty over the amount you have to pay each month and means that you avoid having to remortgage every 2 to 5 years which saves on fees.
In America these very long fixed rate mortgages are very common, most likely why we’re starting to see them start to be available in the UK.
Need Any Help? Talk To a Mortgage Advisor
This post is aimed to be for information only and not advice. Every person has different requirements although my hope is that sharing the main pitfalls and things to consider will hopefully enable you to make a more informed decision.
If you do need tailored advice or guidance, please speak to a mortgage advisor and they’ll be able to understand your situation and help you make the decision that’s right for you.
How Long Should I Fix My Mortgage – Verdict
Hopefully this post has helped give you some useful things to consider when trying to decide how long you you should fix your mortgage. If you have a good loan to value ratio and know you aren’t going to move property during the fixed mortgage term, then fixing your mortgage for a long time can be an excellent way to save costs, protect against rising inflation and know exactly how much you need to pay each month for the foreseeable future.