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What Happens When my Fixed Rate Mortgage Ends?
Just like all other types of loans, mortgages carry an interest payment element charged by the lender for loaning a borrower money to buy a property. How much interest you are charged could vary depending on what type of product you have chosen from the lender.
In this article we discuss the difference between fixed and standard variable rate and what options you have.
Difference between fixed rate and standard variable rate
Fixed rates usually lasts between two to five years with the most common being two or five year deals. It is offered by most lenders where interest rate is fixed for a set period and usually a lower interest rate in comparison to the lender’s standard variable rate. Generally two year fixed rate deals are cheaper than five year fixed rate. It is wise to assess your future plans and personal situations such as whether you plan on moving or job changes as this will be important to consider when deciding whether to go for a fixed rate and how long.
Fixed rates products usually carry high early repayment charges which may pose as an expensive inconvenience for borrowers who wish to make changes to their living situation. There are some products which offer fixed rates with no early repayment charges but it is important to read the terms and conditions of product.
Standard variable rates are a lender’s default rate of interest and this is the rate they charge if a borrower is not tied into any other deals. Lenders have different standard variable rates and is dependent on your mortgage terms. This is not linked to the UK base rate and the lender can increase or decrease this rate as they wish. The positive of being on a standard variable rate is that they offer a borrower more flexibility and freedom than fixed rate does by avoiding potentially costly exit fees, especially if they don’t intend to stay in their property long term.
If you are coming towards the end of your fixed rate period and are looking to fix your interest payments again, it is wise to make sure you get organised early enough and start the process so that you can complete your application for a new fixed rate to be in place before your product switches to the lender’s standard variable rate and possibly face increased monthly payments.
What to do when your fixed rate ends
• Arrange for another fixed rate deal with your current lender. A lender will usually contact you a few months before your fixed rate deal expires and is usually a quick and simple process with your current mortgage provider and usually require minimal checks.
• You can choose to do nothing and you will be automatically moved to your lender’s standard variable rate. Be aware that this could trigger an increase in your monthly mortgage payments if the rate charged is higher than the fixed rate you were on. You can always switch to a fixed rate deal later on if you wish.
• If you wish to borrow more or make changes to your mortgage, you may wish to get a different mortgage product with your existing lender. This tends to require more checks especially if you are borrowing more or taking someone’s name off a mortgage.
• You may choose to remortgage with a different lender. This may require checks similar to when you first applied for a mortgage but it should be easier unless your situation has changed.
When you shouldn’t fix your mortgage rate
• Planning to sell your property or move – fixed rate deals usually carry with them high penalties for early repayments. Some lenders may provide you with the option to port your mortgage product to a new property but you may be limited in property choice as it might be difficult to port to a more expensive or cheaper property. It is wiser to stay on a standard variable rate if you are considering a change.
• If you are towards the end of your repayment mortgage term – as the interest charged lowers each month, fixing your rate may not have much real benefit if you are towards the end of your mortgage.
• Your standard variable rate is low – it is wise to check your standard variable rate as some people are fortunate to have low variable rates as part of their mortgage terms.
If you are reaching the end of your fixed rate mortgage deal, then you should explore your options to avoid paying more than you need to. Talking to a mortgage broker can provide you with the answers to your questions and in most cases taking up another fixed rate deal is more cost effective than doing nothing at all.