How to Decide the Length of Your Fixed Rate Mortgage?
With interest rates constantly changing and horror stories emerging about borrowers faced with interest rate hikes when their fixed rate deal ends, you may be anxious about setting your fixed rate period.
Deciding the length of your product term is not an exact science and much of it comes down to your personal appetite for risk. Some people are opting for short product terms currently, hoping that interest rates will come down so that they can switch to a more competitive rate at a later date.
Others are taking longer product terms because they anticipate the market getting worse over the next few years. Let’s explore fixed rate deal terms in detail.
What is a Fixed Rate Mortgage?
A fixed rate mortgage is a type of mortgage interest rate that remains fixed for the entire duration of your product term.
Your product term should not be confused with your overall mortgage term. For example you may have a 5-year product term and a 25-year overall term on your mortgage.
In this scenario your interest will be fixed for 5 years and the remaining 20 years will be on the lender’s standard variable rate if you choose not to remortgage.
Fixing a rate or a fixed rate simply means your interest rate (and payment) remains the same over the time you have the rate in place. For example, if you have a fixed rate of 5% it will remain at 5% for the entire product term duration.
Tracker Rate or Base Rate Mortgages
A common alternative to a fixed rate is a tracker rate mortgage. At the end of 2022, tracker rate mortgages gained popularity because they were comparatively cheaper than fixed rate deals being offered by lenders at that time.
Over the last few months, the Bank of England has increased the base rate and lenders have made their fixed rate deals more competitive which makes tracker rates a little less popular at time of writing. However, tracker products often have the benefit of no Early Repayment Charges. Therefore, if you plan to redeem the mortgage prior to the product expiry date, a tracker may be more suitable than a fixed rate due to the low exit costs.
How Long Should I Fix My Mortgage For?
When deciding how long to fix your interest rate for, you need to consider a number of factors:
- Will you be able to remortgage easily when your product term ends?
- Do you expect the interest rate to be higher or lower when you remortgage?
- Does the wider economy look optimistic in the short and medium term?
Once you have asked yourself these questions you will have a better understanding of what is known as your ‘appetite for risk’.
You may expect the economy to improve or anticipate a lower rate on your remortgage which steers you toward a shorter product term. This is typically known as a higher risk appetite as you are gambling on your rate reducing and taking a shorter term as a result.
You may view the market as remaining the same or getting worse over time and opt to fix your rate for longer so that you can budget for your mortgage over a longer period of time. This is known as a risk averse decision because you are reducing the risk of a shorter term and potentially remortgaging onto a higher interest rate.
Unfortunately, there is no correct way to approach this as no one can accurately forecast financial markets. Sometimes a borrower bets on interest rates coming down and the strategy pays off, with their mortgage costs going down compared to someone who was cautious with their product term.
Appetite for Risk
Ultimately, selecting the product term will be about matching your appetite for risk with a mortgage product.
Sometimes a higher risk strategy pays off, but sometimes it costs borrowers much more. For example, many borrowers took short term fixed deals that are now ending and are finding their mortgage costs much more expensive now. These borrowers form the bulk of the horror stories circulating in the media at the moment.
In comparison, cautious borrowers who have fixed their term for longer will be able to weather the current financial market uncertainty for longer with their mortgage payments being lower compared to interest rates available today.
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What Happens When My Fixed Rate Ends
When your fixed rate term ends you have two choices:
- Remortgage onto another product term
- Allow the term to end and pay the lender’s Standard Variable Rate
In most circumstances, you should aim to remortgage onto a new product deal, away from the lender’s Standard Variable Rate. The only exception to this is if your lender has a low Standard Variable Rate compared to the rest of the mortgage market deals available.
As you can appreciate, this is an extremely rare occurrence.
How Do Lenders Calculate a Standard Variable Rate (SVR)
A lender’s Standard Variable Rate is set by the lender at their own discretion. A common misconception is that lenders apply a higher arbitrary interest rate without consideration for their customers.
In truth, lenders set their Standard Variable Rate according to the amount of risk represented across their entire mortgage book. This means at times of economic uncertainty or if a lender fears their book has a lot of high-risk mortgages, the Standard Variable Rate will be higher compared to calmer economic situations.
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Alternatives to Fixed Rate Mortgages
The main alternative to a fixed rate mortgage is a tracker rate mortgage as detailed earlier in this article.
Other product types include Discounted Rates (a discount of the lender’s Standard Variable Rate) and LIBOR Rates (London Inter-Bank Offered Rate). However, these products are far less common than Fixed and Tracker products and they are usually only advised in rare circumstances.
How We Can Help
A mortgage broker can assess a number of factors and help you decide what product term best fits your circumstances. For example, they can check the market and the range of products available and compare them to your risk appetite.
Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Brokerage, offering free, no obligation mortgage advice. Contact us today to discuss your product term or if you are worried about your deal term ending.
Once you become a client of Boon Brokers, you will not need to worry about tracking your mortgage when your fixed rate expires. Our automated systems will send you a text message, e-mail, and a postal letter 6 months before your current rate expires. A broker will then be assigned to manage your case to ensure that your remortgage completes in a timely manner.