What to do when fixed rate mortgageA type of mortgage with an interest rate that is fixed for a... ends
According to banking and finance industry representatives UK Finance, 74% of homeowners in the UK are on fixed rate mortgages while 96% of new borrowers since 2019 have arranged such contracts. The Bank of England has also commented that there has been a recent switch towards longer-term fixed rate mortgages.
Whether shorter or longer-term, however, there will come a time when the fixed rate mortgage ends. What happens then? Let’s take a look at your options for coming out of a fixed rate mortgage.
What is a fixed rate mortgage?
A mortgage is typically a long-term loan secured against property. As with any lending, the advance attracts a rate of interest. The prevailing rate of interest used by lenders at any one time is closely related – but not equivalent – to the Bank of England base rate.
A simple definition adopted by the Bank of England is that the base rateThe interest rate set by the Bank of England, affects the in... determines what you pay for borrowing money and what banks pay you for saving with them.
Although the base rate sets the level of interest banks charge other borrowers, lenders are free to charge a percentage above the base rate. Different lenders may choose different rates and that is what makes for a competitive market in the provision of financial products such as mortgages.
The problem for long-term borrowers such as mortgage holders is that the rate of interest on the loan may vary over time. This makes for uncertainty in the level of mortgage repayments that need to be made – and difficulties, therefore, in managing what is likely to be the most significant element of expenditure in many household budgets.
To dispel much of that uncertainty – especially during the early years of a borrower’s mortgage, when the domestic budget might be its tightest – mortgage lenders offer so-called fixed rate mortgages where monthly repayments remain the same (they are “fixed”) even if the Bank of England base rate and the mortgage provider’s rate varies during the period for which the rate is fixed.
What happens when my fixed rate mortgage ends?
Mortgage lenders offer fixed rate mortgages in order to boost their competitiveness in the market for borrowers who appreciate and welcome a period – however temporary – during which they can rely on monthly mortgage repayments to remain the same and are fixed in line with a known rate of interest.
While a fixed rate might be offered by the lender as an incentive to attract new borrowers, the period for which that fixed rate remains may vary. Different lengths for the fixed rate period represent further elements of competition between lenders eager to attract new customers.
The longer the fixed rate period, of course, the greater risk for the lender that base lending rates will rise while the rate charged to the borrower remains static. The longer the fixed rate, therefore, the higher the rate of interest.
To strike a suitable balance between the security of a fixed rate yet within affordable bounds, the most popular choice has conventionally been the two-year fixed rate mortgage. As uncertainty about mortgage rates has grown, however, demand has increased for competitively priced longer-term fixed rates of five years. The price differential between these two- and five-year fixed rate mortgages has steadily eroded.
Once the fixed rate period ends, the borrower typically makes repayments at the lender’s standard variable rateThe interest rate charged by the lender that can vary over t... (SVR) of mortgage interest. Your monthly repayments are no longer fixed, and you can typically expect them to rise.
What are my options when my fixed rate mortgage ends?
You will know from the outset how long your fixed rate period will last. Yet it is surprising how many borrowers appear to be caught out by that date and fail to prepare for the most suitable option once it arrives.
Reversion to your lender’s standard variable rate, for example, might be perfectly acceptable to you. But many borrowers do not realise that the alternative may be to secure a further alternative fixed rate mortgage with another lender – effectively remortgaging the home with an alternative mortgage provider.
Furthermore, you can make that switch and set up your alternative fixed rate deal up to six months before your current arrangements expire.
If you currently enjoy the benefits of a fixed rate mortgage, therefore, the sooner you look to your options for when it expires, the better.
Should I remortgageRefinancing an existing mortgage with a new mortgage. after my fixed term ends?
Choosing between a simple reversion to your current lender’s standard variable rate and a remortgage will depend entirely on your particular needs and circumstances.
A remortgage might give you the reassurance of a further fixed rate loan – and your choice may be wide.
If you allow your existing mortgage simply to roll over to a standard variable rate, however, it may be administratively more straightforward to stay with the same lender and you will potentially avoid any fees involved in the early repayment of your current mortgage and setting up a new mortgage.
Comparing the costs involved and the difference in interest rates, you can choose the most appropriate mortgage solution for you – whether you stay with your current lender’s SVR mortgage or remortgage to a fixed rate.
If you enjoy the benefits of a fixed rate mortgage, it is clear that sooner or later the deal will come to an end, and you will automatically revert to the lender’s standard variable rate of interest – unless you pursue other options.
You might want to discuss the pros and cons of each of these options with us here at NeedingAdvice.co.uk. We can advise you on the availability of alternative mortgage arrangements and guide you through the process of remortgaging your home if that is the most appropriate solution for you.
FAQs – What to do when a fixed-rate mortgage ends
What Happens at the End of a Fixed Rate Mortgage?
When the fixed rate period of a mortgage ends, the lender may offer you a new fixed rate mortgage. Or if they can’t offer you another fixed rate deal, they might offer you a variable rate mortgage. A variable rate mortgage means the amount you pay each month changes every year. You might be offered a longer repayment term (for example, five years instead of three) to make up for the fact that the interest rate on your loan will go up over time. But you’ll also pay more interest than if you’d had a shorter term. This depends on you, your loan provider and what you’ve decided about your future. You may decide to stay on your current fixed-rate mortgage deal or move on to a new one. Your lender may offer you a different fixed rate mortgage deal, or you may decide to go into a repayment plan. If you’re on a fixed rate mortgage, it can be a great idea to speak to a Mortgage Advisor who can help you make decisions about your options. After your fixed-rate mortgage expires, you may be able to refinance or extend your loan. You might also want to consider refinancing if interest rates drop. Speak with a fixed-rate mortgage broker today!
What are my options when my fixed rate mortgage ends?
Fixed-rate mortgages are great for people who want certainty over time. When you’ve got a fixed-rate mortgage, you know exactly how much money you’ll pay as monthly payments. You also know exactly what you’ll be paying for the rest of your life. But there are times when you may need to change your current mortgage provider. For example, maybe you’re moving house or you want to take advantage of a lower interest rate. Whatever your reason, you should speak to a mortgage advisor about whether changing your fixed-rate mortgage to another type of deal could be right for you.
Read about fixed-rate mortgages on our blog website.
Should I remortgage after my fixed term ends?
You should always think about remortgaging if you’re paying more than 4% per annum on your current loan. Even though this is a high-cost option, you could save money over the long run by taking advantage of lower rates. It’s important to remember that if you remortgage, you’ll have to repay any difference between the cost of your old mortgage and the cost of your new one. So you’ll need to work out how much you can afford to borrow before making a decision. You might find that a cheaper mortgage isn’t available in your area. In this case, you might want to look at other ways to reduce the cost of your mortgage such as cutting back on unnecessary expenses and reducing the size of your mortgage payment.
If you don’t want to remortgage, then you might want to consider extending your existing loan. This means you’ll continue to pay the same amount each month but you’ll have a longer repayment term. The length of the repayment term depends on many things including How much you owe; What your credit rating is like; And how much extra you can afford to pay each month. If you’re happy to carry on repaying your loan over a longer period, you may be able to get an extension. However, you’ll still have to pay off the full value of your home within the extended period. If you’re not sure whether you want to extend your loan, talk to a mortgage adviser.