After a fixed rate mortgage ends, fix again? For how long?

If your fixed mortgage has ended, or will soon, you could face a large increase in your mortgage payments unless you get another fixed rate.

Two years ago, in January 2017, a two-year fix was the most popular mortgage choice and a typical rate was about 2.3%. Those fixes are coming to an end and most mortgages will be going back to their lender’s variable rate known as the SVR.

But the average SVR in January 2019 is 4.9%, so that means a big increase for borrowers… but the good news is that new fixed rates are much lower. Broker L&C says that:

The spread between fixed rates and SVRs is the widest it’s been since February 2008.

When a fixed rate mortgage ends, you have four options:

1. do nothing – your mortgage moves to a variable interest rate with your current lender;
2. get another fixed rate from your current lender;
3. get a different mortgage with your current lender;
4. remortgage with a different lender.

Getting a new fix is often easy – even if your credit record is poor you may be able to get a good rate from your current lender.

More than four million households are paying the SVR and most of them could do better, sometimes saving over a £1000 a year, by switching.

You can switch months or years after your fix has ended – you haven’t lost your chance if you don’t do it straight away.

This article looks at the four options so you can see which is right for you. And the important questions – who shouldn’t fix? how long should you fix for?

 

Your four options when a fixed rate mortgage ends

1. Do nothing and pay a variable interest rate

At the end of a fixed rate,  your mortgage continues but the interest rate changes.

Am example: You took out a 25-year mortgage and a 3-year fix. At the end of that three year fix:

• your mortgage term has dropped to 22 remaining years;
• your interest rate changes to the variable interest rate that was set in your mortgage terms.

For most mortgages, the variable rate you will pay is your mortgage lender’s Standard Variable Rate (SVR). SVRs vary a lot between lenders – in August 2018 Halifax’s SVR is 3.74% and Santander’s is 4.99%.

Some people may have a tracker variable rate that changes when some other rate (often the Bank of England base rate) moves.  Yours could be described as base rate plus 2% for example.

You need to know what your mortgage says and you also need to know what this rate is at the moment. If you aren’t sure, phone your lender – the answer is going to be very important for deciding what to do next.

If the new rate you will be paying sounds OK, it may still be worthing fixing so you will be safe from interest rate increases for a few years

2. Get another fix from your current lender

You can keep the same mortgage and get another fixed rate from your current lender. This is usually simple. Most lenders won’t need to go through affordability calculations or look at your credit record. I’ve heard people say it took them a quarter of an hour online with their current mortgage provider.

Getting another fix keeps everything else about your mortgage the same: the term, the amount borrowed etc.

So with the 25-year mortgage 3-year fix example above, if you now choose a 5-year fix your term stays at 22 years. And in 5 years time when the new fix ends, you will have 17 years left on your mortgage.

A lender will often write to you a few months before your fix ends and offer another one.  Look out for this letter – it isn’t just junk mail!

This may be a good offer, but it isn’t always – they are hoping you just accept it without looking at other possible deals. Many lenders keep their best deals for new customers…

So ask yourself:

• should I fix, if so, how long for?
• could I get a better deal elsewhere?

3. Remortgage with your current lender

Sometimes you want to change the details of your mortgage, for example:

• add your partner’s name to the mortgage;
• borrow more money, or pay a chunk off;
• change the length of the mortgage.

Here you aren’t simply looking for a new fixed rate, you need a completely new mortgage.

This isn’t as simple a just getting a new fix. The lender will want to look at the affordability of the new mortgage – especially if you are borrowing more or taking someone’s name off the mortgage. There may need to be a new valuation of your house, proof of your income, your credit records will be checked and bank statements looked at. There may be legal fees but these can usually be included in the mortgage.

If your lender says No to the new mortgage, ask why. Then you may want to see if you can get the mortgage you want from a different lender.

4. Remortgage with a different lender

This is getting a completely new mortgage. The new lender will need to see proof of your identity, value the house and look at your finances to check the mortgage is affordable. This may sound stressful but it’s not as bad as buying a house because you already own the house and you can always carry on with your current mortgage!

What deals you may get depends on how much equity you have. Equity is the current house value minus your mortgage, so you need a rough value for your house. If you have more than 20% equity you will have a wider choice of deals and they will be cheaper than if you have only 10%.

When shouldn’t you fix?

There are three main situations where it probably isn’t a good idea to get a new fixed rate:

• if you are likely to move soon, it may be better to stay on a variable rate until you do. Most fixed rates have penalties – sometimes large – if you repay them early. In theory getting a portable mortgage should solve this,  but porting the mortgage to your new house doesn’t always work well if you need to borrow more, or are buying somewhere a lot cheaper.
• when you are close to the end of a repayment mortgage, staying on a variable rate makes sense. The interest you are being charged is dropping every month, so the gains from fixing are less.
• if you are paying a low variable rate, some people are lucky to be paying 2.5% or even less on a variable rate because of the terms of their mortgage – few of them will gain from switching! The regulator has used 3.7% as the boundary here, saying that most people paying more than this should gain from switching.

How long should you fix for?

If you get a fixed rate, you are protected from any rise until the fix ends. Rates have gone up twice in the last eighteen months and they may well go up further.

Longer fixes give you more protection but they cost more. In June 2019 the average two-year fix was 2.49%, while the average five-year fix was 2.85%.

You can think of the extra money as paying for “insurance” against a rise in interest rates. It can be hard to weigh up if this is worth it but rates are very low at the moment so this may be a good time to lock them in.

The fees charged can vary a lot. The larger your mortgage, the more important the interest rate is and the less important the fee is. With a small mortgage or for a two-year fix, the size of the fees matters most. MoneySavingExpert has a calculator to compare 2 different mortgage fixes.

Some common situations

Your house has gone up a lot in value

This is good news because you will have a better choice of deals – if you just scraped a 5% deposit when you bought two years ago and now you have more than 10% equity for example.  Here you may be able to get big savings by shopping around and looking at other lenders, so don’t take the first deal your current lender suggests.

Things have got harder

If your family has got larger, your income has fallen, you are now self-employed, you have a lot more debt, or a poor credit rating … anything like this suggests that you may find it difficult to remortgage with a different lender. Getting a new fix on your current mortgage may be your only option.

You want to borrow more to extend the house / new kitchen

When your mortgage fix ends is the best time to look at this, but it may be harder than you expect. Many lenders will insist you have at least 15% or 20% in the property after the remortgage. And it may mean paying a higher interest rate on your whole mortgage. Go through a broker, not direct to a lender.

Do consider unsecured loans as an alternative. Putting building costs on your mortgage may sound cheap, but you will be paying for them over a long while. It could be less expensive to pay a higher rate of interest and repay the loan in 7 or 10 years.

You want to borrow more to repay some expensive debt

You need a lot of equity for this to work – you won’t be able to borrow down to 5%.  Some lenders won’t allow it at all and most will limit the amount you can have,

Even if you can do this, it may not be a good idea. A lot of people just go on to get more credit once consolidating has “solved” their previous debt problems – in a few years time you have debt problems again and a much bigger mortgage.

If your situation is so difficult you are thinking of going to a broker who specialises in bad credit, take some debt advice first. There may be other options for dealing with large unsecured debts such as an IVA – but once you have put debts into your mortgage, these don’t work.

Extend the term of your mortgage

If you are remortgaging with a different lender, it can be tempting to go back to a 25-year mortgage, as that will reduce your payments even further.

But the point of a mortgage is to actually buy your house not be on an endless treadmill of 25 years mortgages. It’s usually best to resist this temptation and stick with your current term. And if you originally had a 30 year or longer mortgage, and you are now more comfortably off, this would be a good point to try to reduce your mortgage term!