Mortgage Rates & Fixed Deals Explained

Mortgage rates can have a significant effect on both your monthly payments and the overall cost of your mortgage.

But choosing a mortgage isn't simply a case of finding the lowest interest rate on a comparison table.

A mortgage with a slightly lower rate could have a higher product fee. A five-year fixed rate may provide longer payment certainty, while a two-year fixed rate gives you an earlier opportunity to review your mortgage. A longer mortgage term can reduce the contractual monthly payment but may substantially increase the amount of interest paid over the life of the mortgage.

Understanding how these elements work together can help you make a more informed decision.

This guide explains mortgage interest rates, fixed-rate periods, tracker mortgages, fees, mortgage terms and some of the factors to consider when comparing mortgage products.

What Is a Mortgage Interest Rate?

The interest rate is the percentage charged by the lender for borrowing the money.

Your mortgage payment will depend on several factors, including:

• The amount you borrow

• The interest rate

• The mortgage term

• Whether the mortgage is repayment or interest-only

• The type of mortgage product

For a typical capital-and-interest repayment mortgage, each monthly payment contains both interest and repayment of some of the amount borrowed.

Over time, assuming payments are maintained, the outstanding mortgage balance reduces.

Why Do Mortgage Rates Change?

Mortgage pricing is influenced by a range of factors.

These can include expectations for future interest rates, wholesale funding costs, swap rates, competition between lenders, the lender's funding position and wider economic conditions.

The Bank of England Bank Rate is important, but fixed mortgage rates do not simply move up or down by exactly the same amount whenever Bank Rate changes.

This is why mortgage lenders can sometimes increase or reduce fixed rates even when the Bank of England hasn't changed Bank Rate.

Mortgage pricing can also change quickly. A product available when you first start looking for a property may not necessarily still be available when you're ready to apply.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage provides a set interest rate for an agreed initial period.

Common fixed periods include:

• 2 years

• 3 years

• 5 years

Other fixed periods can also be available.

During the fixed period, your interest rate doesn't normally change because market interest rates have moved.

This provides greater certainty over your contractual mortgage payment during the fixed period, assuming there are no other changes affecting the mortgage.

At the end of the fixed period, you will normally need to consider what happens next.

What Happens When a Fixed Rate Ends?

When your fixed-rate period finishes, your mortgage doesn't disappear.

Unless another arrangement has been made, the mortgage would normally move onto the lender's applicable reversion rate, often its Standard Variable Rate or another rate specified in your mortgage contract.

You may have several options at that stage, depending on your circumstances.

These could include:

• Taking another product with your existing lender

• Remortgaging to another lender

• Remaining on the lender's reversion rate

• Repaying some or all of the mortgage, where appropriate

Eligibility, affordability, property value and lender criteria can all influence the options available.

It can therefore be sensible to start reviewing your mortgage before your existing deal expires rather than waiting until the final day.

Two-Year vs Five-Year Fixed Mortgage

One of the most common questions borrowers ask is:

Should I fix my mortgage for two years or five years?

There isn't one answer that is right for everyone.

The decision involves more than predicting whether interest rates will rise or fall.

Your personal plans, attitude towards payment certainty, mortgage fees and likelihood of moving or changing the mortgage should all be considered.

How a Two-Year Fixed Rate Works

A two-year fixed mortgage provides a fixed interest rate for approximately two years, subject to the exact dates and terms shown in the mortgage offer.

One potential advantage is that you have an earlier opportunity to review your mortgage.

If mortgage rates are lower when the fixed period ends, you may potentially be able to take advantage of the rates available at that time, subject to eligibility and market conditions.

However, the opposite is also possible.

Rates could be higher when your mortgage needs to be reviewed.

A shorter fixed period also means that you may need to arrange another mortgage product sooner.

That could involve another product fee, valuation, legal work or other costs depending on the route you take.

How a Five-Year Fixed Rate Works

A five-year fixed mortgage provides a fixed interest rate for a longer period.

The main attraction is generally payment certainty.

You know that the mortgage interest rate is fixed for the agreed period, regardless of movements in wider interest rates.

This can be useful for households that value predictable mortgage payments.

However, fixing for longer also means committing to the product for longer.

If mortgage rates fall significantly, you generally can't simply leave your existing fixed mortgage without considering the terms of your mortgage and any applicable early repayment charges.

Your future plans therefore matter.

Is a Two-Year or Five-Year Fix Better?

Neither is automatically better.

A two-year fix may appeal to someone who wants an earlier opportunity to review their mortgage.

A five-year fix may appeal to someone who values longer-term payment certainty.

But the decision should also consider:

• The interest rates available

• Product fees

• Early repayment charges

• How long you expect to remain in the property

• Whether you expect your circumstances to change

• Your future borrowing plans

• Your tolerance for changes in monthly payments

• The cost of potentially arranging another mortgage sooner

Trying to predict exactly where mortgage rates will be in two or five years is inherently uncertain.

A suitable fixed period should therefore be considered in the context of your circumstances rather than based solely on an interest-rate forecast.

What Are Early Repayment Charges?

Fixed-rate mortgages commonly have Early Repayment Charges, usually abbreviated to ERCs.

An ERC may become payable if you repay more than the lender permits, redeem the mortgage or move to another mortgage during the applicable period.

The amount and structure of the charge depend on the mortgage product.

Some ERCs reduce over time, while others may have a different structure.

Before choosing a fixed-rate mortgage, understand the ERC period and how it could affect you if your plans change.

This can be particularly important if you think you may move home, sell the property, receive a large sum of money or want to refinance during the fixed period.

What Does Porting a Mortgage Mean?

Some mortgages are portable.

Porting generally means applying to take an existing mortgage product with you when moving to another property.

However, portability isn't a guarantee that you can transfer the mortgage.

You will normally need to satisfy the lender's criteria and affordability requirements at the time, and the new property will also need to be acceptable to the lender.

If you need additional borrowing to purchase the new property, that additional amount may be arranged on a different product and rate.

Always check the exact terms of your mortgage before assuming it can simply move with you.

What Is a Tracker Mortgage?

A tracker mortgage has an interest rate that typically follows a specified external rate, commonly the Bank of England Bank Rate, plus or minus an agreed margin.

For example, the mortgage terms might specify Bank Rate plus a particular percentage.

If the tracked rate rises, your mortgage rate and payments may rise.

If it falls, your mortgage rate and payments may fall, subject to the particular terms of the mortgage.

This is different from a fixed-rate mortgage, where the interest rate remains fixed during the agreed fixed period.

Fixed Rate vs Tracker Mortgage

The key difference is certainty.

With a fixed-rate mortgage, you generally know what interest rate will apply during the fixed period.

With a tracker, your rate can change as the rate being tracked changes.

A tracker could benefit from falling rates, but it also exposes you to the possibility of increasing mortgage payments if rates rise.

The appropriate option depends on your circumstances, the products available and how comfortable you are with potential payment changes.

What Is a Standard Variable Rate?

A Standard Variable Rate, commonly abbreviated to SVR, is a variable interest rate set by the lender.

Many borrowers may move onto their lender's applicable reversion rate after an initial mortgage product ends if they don't arrange another deal.

Unlike a fixed rate, an SVR can change.

The lender's terms will explain how the rate operates.

Remaining on an SVR isn't automatically inappropriate in every circumstance, but it is worth reviewing the available options when your existing mortgage deal is approaching its end.

Why the Lowest Mortgage Rate Isn't Always the Cheapest Deal

Imagine two mortgages.

One has a slightly lower interest rate but a substantial product fee.

The other has a slightly higher rate but a much smaller fee or no product fee.

The mortgage with the lowest headline rate isn't automatically the least expensive option over the period being compared.

The mortgage amount matters too.

A product fee can have a proportionally greater effect on a smaller mortgage than on a much larger one.

This is why mortgage comparisons should consider both the rate and the associated costs.

What Is a Mortgage Product Fee?

Some mortgage products charge an arrangement or product fee.

Depending on the mortgage, the fee might be:

• Paid upfront

• Added to the mortgage

• Deducted or handled in another way specified by the lender

If a fee is added to the mortgage, you may pay interest on it while it remains outstanding.

A fee-free mortgage isn't automatically cheaper either.

The interest rate may be different.

The overall cost needs to be considered.

What Is APRC?

You may see APRC, or Annual Percentage Rate of Charge, on mortgage illustrations.

APRC is intended to provide a measure of the overall annual cost of the mortgage based on prescribed assumptions and includes certain costs associated with the mortgage.

It can be useful information, but it shouldn't be viewed in isolation.

For example, many borrowers don't necessarily keep exactly the same mortgage arrangements for the entire original mortgage term.

When comparing products, your mortgage adviser can explain the costs relevant to the period being considered alongside the longer-term information shown on the mortgage illustration.

How Does Loan-to-Value Affect Mortgage Rates?

Loan-to-value, or LTV, compares the amount being borrowed with the value or purchase price used by the lender.

For example:

Property value: £300,000

Mortgage: £270,000

Loan-to-value: 90%

A lower LTV means you are borrowing a smaller percentage of the property's value.

Mortgage lenders commonly offer different products at different LTV bands.

Depending on market conditions and lender criteria, a larger deposit or more equity can sometimes provide access to different mortgage products or rates.

However, using all of your savings simply to reach a lower LTV isn't automatically the right decision.

Maintaining an appropriate emergency fund should also be considered.

How Does the Mortgage Term Affect My Payments?

Your mortgage term is the period over which the mortgage is scheduled to be repaid.

For example, you might consider a mortgage over:

• 20 years

• 25 years

• 30 years

• 35 years

• 40 years

Subject to lender criteria and your circumstances, a longer term generally reduces the contractual monthly payment on a repayment mortgage.

But there is an important trade-off.

A longer mortgage term generally means paying interest for longer and can increase the total amount repaid over the life of the mortgage.

A shorter term generally produces a higher monthly payment but can reduce the amount of interest paid over the full mortgage term.

Should I Choose the Longest Mortgage Term Available?

Not automatically.

Longer mortgage terms can help with monthly affordability, particularly for first-time buyers facing high property prices.

But the monthly payment shouldn't be considered in isolation.

When comparing different terms, look at:

• Monthly payment

• Total amount repayable

• Total interest

• Your age at the end of the term

• Expected retirement age

• Your current household budget

• Potential future changes in income

• Overpayment options

The appropriate term should balance affordability today with the longer-term cost of borrowing.

Can I Overpay My Mortgage?

Many mortgage products allow borrowers to make some level of overpayment without an Early Repayment Charge, but the rules vary between lenders and products.

Overpaying can reduce the outstanding mortgage balance and potentially reduce the amount of interest paid.

However, you should check your lender's permitted overpayment rules before making additional payments.

You should also consider whether using savings to reduce your mortgage is appropriate for your wider financial circumstances.

Maintaining accessible emergency savings can be important.

What Happens if Interest Rates Fall After I Fix?

If you've chosen a fixed-rate mortgage, the rate generally remains fixed for the agreed period.

That means you don't automatically receive a lower rate simply because new mortgage products become cheaper.

Leaving the mortgage during the fixed period may involve Early Repayment Charges and other costs.

This is one of the trade-offs of choosing a fixed rate.

You gain protection from rate increases during the fixed period, but you may not automatically benefit if market rates fall.

What Happens if Interest Rates Rise After I Fix?

Your agreed fixed mortgage rate generally remains unchanged during the fixed period.

This means movements in wider interest rates don't normally change the rate you're paying during that period.

That payment certainty is one of the main reasons borrowers choose fixed-rate mortgages.

However, when the fixed period eventually ends, the mortgage rates available at that time may be higher or lower than the rate you've been paying.

Should I Wait for Mortgage Rates to Fall?

This is a difficult question because nobody can know with certainty exactly where mortgage rates will be at a particular future date.

Waiting can have consequences too.

Property prices may change, the property you want may sell, your circumstances may change, and mortgage products can be repriced in either direction.

Instead of basing a property purchase entirely on an interest-rate prediction, consider whether:

• You can afford the property

• You have an appropriate deposit

• The monthly payments are comfortable

• You have sufficient emergency savings

• The property meets your longer-term needs

• The mortgage is appropriate for your circumstances

Mortgage rates are important, but they're only one part of the decision.

Why Mortgage Advice Can Be Useful

Comparing mortgages involves much more than sorting a list by interest rate.

A mortgage adviser can consider the interaction between:

• Rate

• Fees

• Loan-to-value

• Mortgage term

• Fixed period

• Early repayment charges

• Lender criteria

• Affordability

• Property type

• Your future plans

Cambs Ely Mortgages has access to over 200 lenders, allowing us to investigate mortgage options based on your circumstances and requirements.

The objective isn't simply to find the smallest number in the interest-rate column.

It is to understand the mortgage as a whole.

Before Choosing a Mortgage, Ask Yourself

☐ How much can I comfortably afford each month?

☐ How much deposit or equity do I have?

☐ Do I value longer-term payment certainty?

☐ Could I move home during the fixed period?

☐ Are there Early Repayment Charges?

☐ Does the mortgage have a product fee?

☐ What is the total cost over the period being compared?

☐ What happens when the initial deal ends?

☐ How does the mortgage term affect the overall cost?

☐ Can I make overpayments?

☐ Could my circumstances change during the fixed period?

These questions can be more useful than simply asking:

“Which mortgage has the lowest rate?”

Explore Your Mortgage Options

If you're preparing to buy your first home, move home or review an existing mortgage, understanding how rates, fees and mortgage terms interact can help you make a more informed decision.

You can use our Mortgage Calculators to explore how different mortgage amounts, interest rates and terms could affect your monthly payments.

You can also read our Mortgage Process Guide to understand how the mortgage application fits into the wider property-buying journey.

Cambs Ely Mortgages provides mortgage advice to clients in Ely, Cambridge, Cambridgeshire, East Anglia and across England, with appointments available remotely.

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Important Information

This guide is for general information and educational purposes and shouldn't be treated as personalised mortgage, financial, legal or tax advice.

Mortgage rates and products can change and are subject to availability, lender criteria, affordability, underwriting and individual circumstances.

Your home may be repossessed if you do not keep up repayments on your mortgage.