If it’s important to know exactly how much your monthly mortgage payments will be, it may be worth your time taking out a fixed-rate mortgage. The rate becomes higher the longer you fix it for.
If you want a possibly cheaper fixed-rate mortgage, then you may be better suited for a 2-year fixed-rate mortgage. Your payments will be lower, but 2 years isn’t exactly a long time and before you know it, you’ll be looking for a new deal all over again. If interest rates rise in the meantime, then at renewal you may find yourself with higher payments.
Applying for a mortgage can be quite a hassle for some. If you’d rather avoid doing this for as long as possible, you may be better opting for a 5 year fixed rate. Payments would be coming out at a steadier pace, for a much longer period.
They are more expensive than 2 or 3-year deals however, with a downside being that if interest rates fell during your term, you would not benefit from a reduction in your monthly payments.
Whilst 2 and 5 year fixed rates tend to be the more popular of the lot, you are able to fix your rate for longer. In some cases, lenders may offer 7 or 10-year fixed-rate mortgages.
These longer terms have never been widely popular in the UK. Maybe that’s down to a feeling of knowing a lot can change in a decade, and we don’t want to get tied down to deals we can’t get out of.
If your circumstances happen to change, repaying your mortgage early can cost you money. This is referred to as an early repayment charge or ERC. This ERC is usually calculated as a percentage of what you owe the lender.
An example of this, is if you settle a £100,000 mortgage early and the ERC is 2%, then you would receive a £2,000 penalty for breaking your contract. The idea of “beating the system” or predicting what will happen to interest rates in the future, is usually a mistake.
You should focus on your own personal situation. For example, are you likely to move home again in the future? Would you look to pay a lump sum off your mortgage? Maybe you’d like to carry out home improvements, which might give you a lower loan to value (LTV) at the point of remortgage?
It’s also recommended to avoid chasing “headline” deals. The lowest rates often come with higher arrangement fees, which customers can be keen to avoid.