How long should I fix my mortgage for?
When taking out a new mortgage product, you will have the choice of either choosing a fixed rate or a variable rate.
A fixed rate mortgage deal provides stability and sets the interest rate on your mortgage repayments for a pre-determined period. This means your monthly mortgage payments will remain the same each month until the end of your agreed fixed term. A fixed rate is very helpful if you want to budget for a specific period of time.
When choosing a fixed rate mortgage, you will have to decide how long to fix for. The most popular options are 2, 3 or 5 years, and whilst some lenders will offer longer fixed rates these are generally less popular because they’re usually at a higher rate, and fixing for a long time can feel like a big commitment.
When deciding on how long to fix your mortgage for it depends very much on your individual circumstances and personal preference, and whether these are likely to change over the short term, as well as how long you want peace of mind that your payments won’t change.
You might have an opinion on what interest rates might do in the future, but your adviser won’t be able to make a recommendation based on interest rate forecasts, because quite simply there is no guarantee that forecasts will come true. So you should base your decision on other factors primarily.
Things to consider when choosing a fixed rate:
What are the current interest rates like?
When deciding how long to fix your mortgage rate, you should take into account what the current interest rates are. If interest rates are low, you could consider fixing your mortgage interest rate for a longer period. You will then be locked into the lower interest rate for a longer period of time.
However, if interest rates are high, and if you think they are likely to fall in the short term, you could consider fixing your mortgage rate for a shorter period of time. But beware, as recent changes have shown, rates can continue to increase for some time.
How long are you planning on living in the property?
If you are only planning on living in a property for a few years, you could consider a longer fixed-rate mortgage deal that matches your future plans.
If you were planning on living in your property for a short period e.g., 2-3 years, you may want to consider a shorter fixed rate period which gives you more flexibility once your fixed rate deal ends.
Many people choose short term two-year fixed rate mortgages because they provide them with greater flexibility than if they were locked in to a five-year deal. For example, if interest rates fall over the next couple of years, you’ll be free to remortgage to a lower rate as soon as your deal finishes. However, there are no guarantees this will happen and no-one can accurately predict what might happen to rates in the future.
One of the downsides of locking into a two-year fixed rate mortgage is that rates are currently higher for short-term deals than they are for longer-term fixes, so your mortgage payments during the two-year period could cost you more than if you signed up for a five-year fix. You’ll also have to review your mortgage again in a couple of years and potentially pay another lender arrangement fee and broker fee when you come to remortgage.
One of the benefits of going for a longer-term fixed rate mortgage is that five-year fixed rates are currently lower than two-year fixed deals, so your monthly payments would cost less. This is because markets are anticipating that once inflation is brought under control, interest rates may start to fall again.
Another advantage of locking in for the long term is that you’ll have peace of mind that your payments will remain the same for a longer period. This budgeting certainty can be very valuable if you’re under financial pressure and would struggle to cope with fluctuating payments.
However, there are other factors to consider. For example, although most fixed rate deals are portable, so you can take them when you move, it’s not just as simple as switching your mortgage over to a new property. You will still need to meet the lender’s requirements when you take it across to your new home, and if your circumstances have changed since you took out the mortgage, you may no longer meet your lender’s affordability criteria. It’s also worth noting that if the property you want to buy costs more than your old home, any additional borrowing you might need is likely to be at a different rate and your lender may not offer the best deals at the time.
Another potential drawback is that as you’ll be locked into your rate for longer, if interest rates fall substantially, you could find that you’re stuck paying a higher rate, as most fixed mortgage deals have early repayment charges during the fixed rate period.
It should always be a personal choice and based around your individual circumstances. Its important to get expert advice and consider all possible options.
If this has got you thinking, or you’re within 6-9 months of your current deal ending, we’d love to hear from you. Get in touch and we’ll be help you understand what’s possible, or sign up to our monthly newsletter, to keep your finger on the pulse.
Undray Griffith – 23rd June 2023