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Five year fixed rate mortgages - What I need to know

Five year fixed rate mortgages - What I need to know

Arranging a  mortgage  can be a daunting process. For many it’s a complicated minefield of confusing percentage rates, financial jargon, and lots of small print. We’ve put together a guide to help you decide if a fixed rate mortgage is right for you…

Tobi Owens
From the Mortgages team
minute read
posted 7 JANUARY 2020

What is a five year fixed rate mortgage?

A five year fixed rate mortgage is a loan that maintains the same interest rate for the first five years you have it, no matter how much the Bank of England interest rates rise or fall in the market. Once the five years are up, your mortgage will generally transfer onto the lenders standard variable rate unless you move to an alternative mortgage.  

A fixed rate mortgage can last less than five years, and also longer. These types of mortgages, like anything in life, do have their pros and cons.

How can I pick the right five year fixed mortgage rate for me?

Once you’ve weighed up the pros and cons and have decided a five year fixed rate mortgage is probably right for you, there’s plenty to think about. While you’re  choosing a lender, there are two immediate things you need to consider are:

The rate itself:  mortgage rates are determined by a variety of factors; your credit history, your location, and the size of your down payment. The higher your deposit, the lower your offered interest rates are likely to be.  

Obviously you’ll want to find the lowest rate available to you, but be wary as some of the lowest fixed rate mortgages may have high arrangement fees.

Fees & charges:  read the small print and make sure you know exactly what you’ll be charged upfront, and what you’ll be charged if you cancel. Even if the second scenario sounds unlikely, it’s always good to consider these things just in case.

When choosing a mortgage, it is very important to work out the total cost – rate plus fees – to ensure that you are comparing like for like.

What are the benefits of a five year fixed rate mortgage?

  • Your interest rate is fixed: even if interest rates in the market rise (or fall), yours won’t change for the first five years
  • You’ll know what you’re paying each month: as long as you keep up with repayments right down to the last penny.
  • It makes budgeting a breeze: with no surprises, a five year fixed rate mortgage allows you to budget around your repayments more effectively. This in turn gives you more financial freedom to plan for the future – potentially putting you in a better position when those five years are up.

What are the disadvantages?

  • Your interest rate is fixed: even if interest rates fall, yours will stay the same for those first five years so you could pay more than you might on a tracker mortgage.
  • Hefty fees: when arranging a five year fixed rate mortgage, you typically have to pay a fee. If you can’t afford to pay the fee upfront, you can potentially have the amount added to your mortgage – though you’ll have to pay interest on that too.
  • Changing your mortgage is pricey: if for whatever reason during those five years you decide you want to opt out of your fixed term rate, then most mortgage lenders may charge you a penalty. Depending on when you want to leave, the Early Repayment Charges (ERC) could cost you thousands of pounds, so make you only take a fixed term if you’re sure you’re going to stay in it for the full fixed period.

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