What happens when my fixed-rate mortgage ends?
Every month hundreds of thousands of borrowers reach the end of their fixed-rate mortgage deal. In most cases, that means their mortgage payments are set to rise – in some cases by a lot.
But you can take action to avert these higher costs. The following will explain exactly how fixed-rate mortgage deals work – as well as how to get the lowest possible rate and keep your repayments down.
What is a fixed-rate mortgage?
If you take out a fixed-rate mortgage, the interest rate on the deal will be locked in place for a fixed period, whether that be two, three, five or 10 years.
For example, you might get a five-year fixed-rate mortgage charging 2pc. You are guaranteed to pay that rate for the whole five-year period, whatever happens to wider interest rates or the economy.
This gives a borrower certainty in knowing how much their monthly mortgage repayments will be in pounds and pence. For many households that is a major help in budgeting. Just a 0.5pc rate rise could add hundreds of pounds to your monthly mortgage bill.
What exactly happens when my fixed rate ends?
Rates that aren't fixed are known as "variable" rate mortgages. These include tracker mortgages, for example, which track a central rate such as the Bank of England's leading Bank Rate (see below for more on trackers).
But the more common variable rates are known as "standard variable rate" or SVR mortgages. These are the rates borrowers move on to at the end of their fixed-rate deal. They are currently far higher than most fixed-rate deals, and may be as high as 4pc or 5pc.
For instance, a lender could offer a two-year fix at 0.99pc, but once the deal ends customers will move to the SVR which is 3.49pc. That's a difference of £371 a month on a £300,000 mortgage over 25 years.
SVRs don’t track the Bank Rate directly, but are instead set by individual lenders and go up or down at their discretion. However they do tend to move more or less in line with wider interest rates, as set by the Bank Rate. So if you see that interest rates are on the rise, you should expect your SVR to go up sooner or later.
What should you do when a mortgage deal comes to an end?
You can either do nothing and pay the higher SVR rate or, depending on your circumstances, you could remortgage to a new deal.
Those that want to remortgage to a cheaper deal should approach their existing lender about better rates three to four months before their current deal ends.
Lenders should contact you before your current deal expires, but many customers might overlook these and end up automatically shifting to the SVR without knowing.
If you get an offer from your lender, make sure to compare it against other deals online using best-buy charts or other sources of information.
If the value of your property has risen significantly since you took out your mortgage, you're likely to be eligible for much lower rates, so make sure you shop around before settling on a deal. A quality mortgage broker can help ensure you do not overlook the best possible rates for your circumstances.
Once you pick the best deal you will need pass the provider’s credit checks and affordability assessment. At that point you’ll be sent a binding offer.
A solicitor will take care of the paperwork and a signed deed will be sent to your new mortgage provider. They will then pay off your existing mortgage by sending funds to your current lender, and once the old mortgage has been repaid in full you will start making repayments to the new lender.
When shouldn't you remortgage?
While an SVR is for most people not a good idea, SVRs might be beneficial for those who want to make mortgage overpayments.
That's because most SVRs don't have early repayment charges attached, so you can usually pay off your entire mortgage without incurring any penalty.
If you have a mortgage that is relatively small, say under £50,000, it might not be worth remortgaging if the new mortgage fees outweigh the potential savings. Also, some lenders won't take on small mortgages.
If your circumstances have changed, for example one of you has stopped working to look after children, then your income will be significantly lower and you may not be accepted by a new lender.
The same is true if you suddenly have bad credit – a mortgage provider will perform a credit check on you when you remortgage, so any black marks will be visible to them and they may choose not to lend.
What is a tracker mortgage – and should I get one?
Trackers tend to follow the Bank of England base rate at a margin above the rate (currently 0.75pc). So, for instance, you might pay Bank Rate plus 1.5 percentage points. You would now pay a rate of 3.25pc. But if Bank Rate rose to 1pc, you'd pay 3.5pc.
With variable rates borrowers suffer higher payments when rates go up.
What will it cost to remortgage?
Remortgaging isn't cheap – there are a host of charges you could be liable to pay, including product fees (ranging from £500 to £2,000 upfront), valuation fees (up to £500), solicitor fees (up to £500), transfer fees (between £25 and £50) and potentially other charges, too.
Depending on the broker you use, if you use one, there may be a fee there, too. But some brokers are free to the borrower and instead make a small commission from the lender once the mortgage goes through.