If your fixed mortgage has ended, or will soon, you could face a large increase in your mortgage payments.
Most mortgage revert to their lender’s Standard Variable Rate (SVR) when a fix ends. In summer 2019, the average SVR is 4.9%. You can get much cheaper fixes than that!
This affects a lot of people. In October 2019, fixed rate mortgages worth £26billion are coming to an end.
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.
This article looks at your choices so you can see which is right for you. And the important questions – how long should you fix for? and who are the exceptions who shouldn’t fix?
Summary – your options when a fixed rate mortgage ends
When a fixed rate mortgage ends, you have four options:
- do nothing – your mortgage moves to a variable interest rate with your current lender;
- get another fixed rate from your current lender;
- get a different mortgage with your current lender;
- 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.
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.
The options in detail
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 – it isn’t 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. You can think of the extra money for a longer fix 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. In 2019 10 year fixes – previously a rarity – are becoming more common and cheaper.
But ending a fixed rate early will cost you an extra fee. So in general you should not fix if you expect to have to move house in that time unless you make sure the mortgage is “portable”. So many people with a growing family or who may need to move for their job will not want to be tied into a 5 year fix, let alone a 10 year one.
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.
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!
A checklist of information
With the following information you will be in a better place to make a decision:
- when your fix ends, what variable rate will you be paying?
- how much equity do you have? What % is this of the house value?
- what is your credit record like? Even if you think it is good, check to make sure there are no nasty surprises;
- ask your lender what deals you could switch to;
- check out the best buy tables, eg MoneySavingExpert’s Mortgage Best Buys.
This article has given an overview. For the details, I suggest you download MoneySavingExpert’s guide to remortgaging. It is long! But now you have the important facts, it’s going to be easy to tell which bits are most important for you.
Need some expert help?
If this all feels too complicated, don’t decide it is too hard and give up!
Get help from an expert – a mortgage broker will be able to suggest good deals and may have access to deals you can’t find. And they are used to helping clients through the how long should I fix for decision. You can find a broker here: Unbiased: Find an adviser. Choose a broker who covers the “whole market” so you get the best choice of deals.
Even if you are good at most things financial, you should still consider using a broker. I don’t normally recommend using an intermediary for something you can do yourself, such as making a PPI claim. But mortgages are an exception – the choices can be complicated and brokers are also experienced in helping a mortgage go through as speedily as possible.
This article is kept up to date.