Five year fixed rate mortgages

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

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

Daniel Evans
From the Mortgages team
minute read
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Posted 4 JUNE 2021

What is a five year fixed rate mortgage?

A five-year fixed rate mortgage is a loan that gives you the same interest rate for five years, no matter what happens to Bank of England interest rates. Once those five years are up, your mortgage will usually transfer to the lender’s standard variable rate, unless you choose to switch your mortgage to a different product or provider. The standard variable rate is typically higher than the fixed rate.  
A fixed-rate mortgage can last for fewer than five years, or even longer. As with many things in life, these types of mortgages have their pros and cons.  

Your home may be repossessed if you don’t keep up with repayments on your mortgage.  

Top tip 

When comparing five-year mortgages, it’s important to consider the APRC figure, not just the initial fixed rate for the first five years. This gives you a better idea of the overall cost of the mortgage because it shows the total costs each year, including all fees and charges.

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

For some, it’s worth fixing your interest rate because: 

  • It gives you security 
    A fixed rate means that, even if interest rates rise, your mortgage payments won’t go up. 
  • You’ll know what you’re paying each month 
    That makes it easier to budget. With no surprises, you’ll have more financial freedom to plan for the future.  

What are the disadvantages of a five-year fixed mortgage?

Five year fixed-rate mortgages do, of course, have their downsides. For example:  

  • Your interest rate is fixed 
    If interest rates fall, you could be stuck paying a higher rate for five years. That may mean you end up paying more overall than you would have with a tracker mortgage
  • You’ll need to pay a fee 
    When arranging a five-year fixed-rate mortgage (as with other mortgages), you’ll usually have to pay a product fee, also known as an arrangement fee. This is the cost for setting up the mortgage. If you can’t afford the fee upfront, you can often have the amount added to your mortgage - but you’ll also have to pay interest on it. 
  • Changing your mortgage during your fixed term is pricey  
    If, for whatever reason, you decide you want out of your fixed-term rate before the five years are up, most mortgage lenders will charge a penalty. Early Repayment Charges (ERC) can cost thousands, so only take a fixed-term interest rate if you’re sure you’re going to stick with the mortgage for the duration. It’s worth checking whether your mortgage is ‘portable’ – in other words, can you take it with you if you move home during the fixed rate period?

What is the average five year fixed rate mortgage today? 

While fixed-rate mortgages aren’t directly affected by the Bank of England base rate – currently at an all-time low of 0.1% – the overall economic climate and the change in base rate can affect the costs of mortgage products for lenders, which are typically passed on to borrowers.

Although mortgages are regulated by the Financial Conduct Authority to make provision of financial products fairer, lenders still base their pricing on risk. Unemployment fears and the coronavirus pandemic mean that in the current economic climate, borrowers should expect a higher interest rate than they would have got a year ago before the base rate dropped.

According to Bank of England data, in April 2021 the average interest rate for a five-year fixed mortgage with 75% LTV (loan-to-value) was 1.74%, compared to 1.67% a year earlier. The average interest rate for those with a 95% LTV was 4.08% in April 2021, compared to 3.39% a year earlier.

How do I choose the right five year fixed rate mortgage for me?

If you’ve decided that a five-year fixed rate mortgage is right for you, there’s plenty to think about. When  choosing a lender, the first things to consider are: 

  • The rate itself 
    The first thing to do is check the five-year fixed mortgage rates. Mortgage rates are determined by several factors: your credit history, where you live and the size of your down payment. The higher your deposit, the lower your interest rate is likely to be.   
    Obviously you’ll want to  find the lowest rate available to you, as a higher interest rate will increase your monthly payments. But be aware that some of the lowest fixed-rate mortgages have high arrangement fees. Always check the APRC, to help you work out the overall cost of your mortgage.
  • Fees and charges 
    Read the small print. Make sure you know exactly what you’ll be charged upfront and what you’ll pay if you cancel. Even if the second scenario sounds unlikely, it’s good to consider these things, just in case. 
    When choosing a mortgage, it’s important to work out the total cost – rate plus fees – to ensure you’re comparing like for like. This is shown as ‘Initial term cost’ in our comparison. It’s the total cost to you within your five-year fixed term, including monthly repayments, the product fee and other associated charges. Ideally, you’ll be looking for the best fixed-rate mortgage with no fees, which although uncommon, can be found. 

How much deposit do I typically need to save? 

How big a deposit you need will depend on the price of the property you’re buying. In the wake of COVID-19, most lenders are insisting on a minimum deposit of 10% to 15%. 

According to HM Land Registry figures, the average UK house price in February 2021 was £250,341, so for that you’d need a 10% deposit of roughly £25,000. If you want access to the cheapest deals, you might have to stump up even more than this. 

If you don’t have a large deposit, don’t despair. Alongside the Help to Buy Equity Loan and Shared Ownership schemes, the Government has a Mortgage Guarantee scheme. The new scheme is set to help increase the supply of mortgages for people with just a 5% deposit.

How your loan-to-value ratio will impact your fixed rate mortgage 

Loan-to-value (LTV) is the percentage your mortgage lender is willing to lend in relation to the value of your property. So, if you have a 20% deposit, the LTV will be 80%. The more deposit you have, the lower the LTV will be. Typically, the higher your LTV, the higher your interest rate and monthly repayments will be. Increasing your deposit and lowering the LTV could mean a better interest rate and lower monthly repayments for the first five years. 

Let’s take a very basic example (not including initial product fees):

You buy a house for £200,000 with a 10% deposit of £20,000. You’ll need to borrow £180,000 so your LTV will be 90%. If the initial interest rate is 2.85%, your monthly repayments will be around £840 for the first five years.

If you increase your deposit to £30,000, your LTV will drop to 85%. Your interest rate drops to 2.15% and your monthly repayments will be £733.

What other mortgage options do I have? 

With all that’s been happening in the past year, it can be hard to work out if a five year fixed rate mortgage is the right solution for you, and if it will help you save money compared to other types of mortgages. Here’s a look at some other mortgage options and how they compare to five year fixed rate products: 

Two year fixed rate
Two year fixed rate mortgages tend to have lower interest rates and smaller monthly payments than five year fixed rate mortgages. A two year fixed deal also means you’re not tied in for as long and won’t have to wait for five years before you can switch deals. 

A two year fixed mortgage offers greater short-term flexibility, but you’ll have to pay a product fee every time it comes to remortgaging. Product fees tend to be higher for shorter-term fixed rate mortgages, so it could outweigh the benefit of a lower interest rate. 

10 year fixed rate
While a 10 year fixed rate mortgage gives you more security over a longer period of time, it also means you’re locked in to the same mortgage deal for a whole decade. Interest rates also tend to be higher than five-year mortgages as you have more security for longer. Also bear in mind that after Brexit and coronavirus, it’s very difficult to predict what will happen over the next ten years. If interest rates fall, you may end up paying a high price for longer security. 

Tracker mortgage
A tracker mortgage is a variable mortgage that follows the Bank of England base rate. This means that your interest rate and monthly payments could go up and down. With the base rate at an all-time low, a tracker mortgage could offer pretty good value at the moment. Just be aware that once the economy starts to pick up, so will the base rate and therefore your interest rate. 

A tracker mortgage can typically last between one to five years, although lifetime trackers can last as long as your mortgage. If you’re looking for a bit more certainty in these very uncertain times, then a five year fixed mortgage might be a better answer

Discounted mortgage
This is another type of variable mortgage, offered at a discounted rate to the lender’s standard variable rate (SVR). The discount is usually for a short period, often around two years. Be aware that SVRs differ between lenders, so a bigger discount from one doesn’t necessarily mean a lower interest rate and a better deal. Check the lender’s SVR as well as the advertised APRC for an overall cost comparison.

And remember that for all types of mortgages, the actual interest rate you’re offered will depend on your loan amount, loan-to-value ratio and credit score.

Compare fixed rate mortgage deals

Looking to compare fixed rate mortgage deals? Let us do the hard work for you. All we need is a few details about you and your property, and we’ll give you a list of appropriate quotes to choose from. 

Frequently asked questions

Can I pay off the mortgage before it ends?

It should be possible to leave your mortgage early, but the bad news is you’ll probably have to pay an Early Repayment Charge (ERC). This could be between 1% to 5%, depending on the amount of time left on your fixed rate period. Your lender can tell you more.

Can I overpay a fixed-rate mortgage?

Many banks will let you overpay a certain amount without penalties. You’ll need to talk to your lender for details, but in most cases it’s up to 10% of your mortgage balance per year during the initial fixed rate period. If you move onto your lender’s SVR, you can overpay as much as you want.

What should I do if my five year fixed rate mortgage is coming to an end?

Your provider’s standard variable rate is likely to be uncompetitive. If your five year fixed rate mortgage is nearly up, it’s worth shopping around to see if you can find a better deal. We can help you compare mortgages quickly and easily.

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