Summary
A fixed-rate mortgage is just that - a mortgage where the interest rate on your payments stay the same for an agreed length of time. Most UK mortgages are set up for this fixed rate term to last for between 2 and 5 years, although some mortgages can be fixed for a long as 10 years.
Once this fixed term deal is up, you face a decision: do you remortgage to secure a new fixed rate, or should you move to the lender’s Standard Variable Rate? We look at your options.
A fixed-rate mortgage is just that – a mortgage where the interest rate on your payments doesn’t change for an agreed period of time. So what do you do when your mortgage term ends?
Once your period of fixed interest is over, you have to make a decision. And if you do nothing, your mortgage reverts to your lender’s standard variable rate of interest (SVR). When your fixed rate term ends, most borrowers are automatically moved onto the lender’s SVR, which usually has a higher interest rate than those available after a remortgage.
What happens if I do nothing when my fixed-rate period ends?
If you do not act, you will stay with an SVR mortgage. Your costs will almost always be higher than your previous payments.
As the name suggests, a variable rate varies, and can change at the drop of a hat. When your agreed rate expires, your new interest rate is now up to your lender, so there isn’t much you can do to prevent an increase in your repayments.
Changes to the Standard Variable Rate are at the lender’s discretion and can affect your mortgage balance, as well as your outstanding balance.
Lenders do not need to disclose why they’re changing your mortgage interest rate.
What affects the interest rate on an SVR mortgage?
Once you are out of your fixed-rate period, your mortgage loan interest rate could rise for a number of reasons.
These include, but are not limited to:
- housing market conditions;
- economic growth (or decline); or
- changes to the Bank of England base rate.
Both interest-only mortgages and repayment mortgages are affected by changes to the mortgage lender’s SVR. Remember that if you decide to switch from your fixed-rate mortgage before the end of the fixed period, you may have to pay an early repayment charge.
Despite this, hiking up the prices by an extortionate amount wouldn’t make much sense as customers can always go elsewhere, so realistically this does provide borrowers with some protection.
Moving away from your SVR mortgage
The instability of a standard variable rate mortgage makes it difficult for people trying to control their budget, which is why the majority of homeowners seek out other types of mortgage.
You don’t have to sign up to what your current lender is offering if it doesn’t suit you.
You can remortgage either with a different mortgage provider, or attempt to get a new deal with your current lender. Remember that many lenders offer preferential rates to existing customers, so comparing offers from different mortgage providers to find the best deal is a key part of the process.
Bear in mind that remortgaging will probably involve another affordability assessment and you’ll have to provide the same supporting documents (such as bank statements and utility bills) as you did the last time you applied for a loan, as well as the same suite of fees!
Costs of remortgaging
The process of remortgaging is likely to include additional costs, such as:
- an arrangement fee;
- a booking fee – AKA a reservation fee (this will not be refunded if you decide not to take a mortgage out);
- a valuation fee (usually free when remortgaging); and
- a mortgage broker fee.
You may incur exit fees and early repayment charges if you pay off your mortgage or switch deals before the end of your agreed fixed rate term.
Some borrowers use a lump sum to pay off part of their mortgage balance early, or consider equity release as an alternative to remortgaging, especially if they want to access money which is tied up their property without selling it.
The total cost of all of these fees could potentially be higher than your potential savings, so working out your best option requires careful consideration.
You should not feel obliged to stay with your previous lender; it’s always a good idea to shop around to see what other mortgage lenders have to offer.
Is there ever a plus side to staying with an SVR?
You should be aware that standard variable rate mortgages are usually more expensive than other interest rates to begin with, but there are some benefits to staying on an SVR mortgage.
Early repayment of your entire mortgage usually incurs no extra charges when you are on an SVR, and due to fluctuating interest rates, your rate could even go down.
Your credit score and its effect on your mortgage options
When your fixed rate mortgage term ends, your credit score becomes a key factor in determining what mortgage deals are available to you. As you know, mortgage lenders use your credit score to assess how risky it would be to offer you a mortgage loan, and your score can have a direct impact on the interest rates and terms you’re offered. A strong credit score can open the door to more competitive fixed rate mortgage deals, potentially allowing you access to lower interest rates and savings on your monthly mortgage repayments.
If your credit score is less than ideal, you may find that the options for your new mortgage deal are more limited, and you could face higher interest payments. That’s why it’s a good idea to check your credit report before your fixed rate mortgage ends. Look for any errors or inaccuracies that could be dragging your credit score down, as even small mistakes can affect the deals you’re offered by lenders.
Improving your credit score before looking for a new mortgage can make a significant difference to your financial situation, as well as having good habits with your money. Simple steps like paying bills on time, reducing outstanding debts, and avoiding new credit applications can help boost your score. By taking action early, you increase your chances of being approved for a better deal when your fixed rate period ends.
A mortgage broker can be invaluable at this stage, and with the right support and a good credit score, you’ll be in a strong position to secure a new mortgage that suits your budget and financial goals.
Should I get a new mortgage deal?
Deciding whether or not to get a new deal on a mortgage is entirely up to you, and isn’t something to be impulsive about.
Sometimes remortgaging isn’t your best option, and at other times it makes things much more straightforward – and cheaper.
We would always recommend you speak to an independent mortgage broker who can review the whole market and provide the best advice to fit your particular circumstances.
Contact our conveyancing solicitors to find out more about our remortgaging services.