A fixed rate mortgage is a popular choice for many homeowners as it offers the security of knowing exactly what your mortgage payments will be for a set period, typically ranging from 2 to 10 years. However, understanding what happens when a fixed rate mortgage ends is crucial for financial planning and ensuring that you continue to secure the best possible mortgage deal.

In this comprehensive guide, we will explore in detail what happens when a fixed rate mortgage ends, how to prepare for the end of your fixed rate period, and the options available to you, including remortgaging after your fixed term ends. We will also discuss the implications of doing nothing when your fixed rate mortgage ends and offer advice on making the best decision for your financial future.

What Is a Fixed Rate Mortgage?

Definition of a Fixed Rate Mortgage

A fixed rate mortgage is a type of home loan where the interest rate is fixed for a certain period, usually between 2 and 10 years. During this period, your monthly mortgage payments remain the same, regardless of any changes in the Bank of England base rate or the lender’s standard variable rate (SVR). This stability makes fixed rate mortgages an attractive option for those who want to avoid the uncertainty of fluctuating interest rates.

How Fixed Rate Mortgages Work

When you take out a fixed rate mortgage, you agree to a fixed interest rate with your lender for a specified term. This term could be 2, 3, 5, 7, or even 10 years. During this period, your monthly mortgage payments will be consistent, making it easier to budget and manage your finances.

At the end of the fixed rate term, your mortgage does not automatically end. Instead, your mortgage will usually revert to the lender’s standard variable rate (SVR), which is typically higher than the fixed rate you were previously paying. This change can significantly impact your monthly payments, so it’s important to understand your options and take action before your fixed rate period ends.

What Happens When a Fixed Rate Mortgage Ends?

Transition to the Standard Variable Rate (SVR)

When your fixed rate mortgage term expires, one of the most common outcomes is that your mortgage will automatically switch to the lender’s standard variable rate (SVR). The SVR is a rate set by the lender and can change at their discretion, often in response to changes in the Bank of England base rate.

Implications of Moving to the SVR:

• Increased Payments: The SVR is usually higher than the rate you were paying during your fixed term, which can lead to an increase in your monthly mortgage payments.
• Uncertainty: The SVR can fluctuate, meaning your payments could go up or down at any time, making budgeting more difficult.
• Opportunity for Remortgaging: Since the SVR is generally not the most competitive rate, many homeowners choose to remortgage to a new deal rather than stay on the SVR.

Your Options When the Fixed Rate Ends

When your fixed rate mortgage ends, you have several options to consider:

1. Remortgage to a New Fixed Rate Deal
2. Switch to a Tracker or Variable Rate Mortgage
3. Stay on the Lender’s SVR
4. Pay Off the Mortgage Early

Remortgaging to a New Fixed Rate Deal

Remortgaging involves taking out a new mortgage deal, either with your current lender or a new one, to replace your existing mortgage. Remortgaging to a new fixed rate deal can help you secure a better interest rate and keep your monthly payments stable.

Advantages of Remortgaging:

• Lower Interest Rates: By shopping around, you may find a new fixed rate deal with a lower interest rate than the SVR, reducing your monthly payments.
• Fixed Payments: Like your previous fixed rate mortgage, remortgaging to a new fixed rate deal will give you the stability of predictable monthly payments.
• Flexibility: Remortgaging provides an opportunity to change the terms of your mortgage, such as the loan term or the type of mortgage.

Disadvantages of Remortgaging:

• Fees and Costs: Remortgaging may involve costs such as arrangement fees, valuation fees, and legal fees.
• Credit Check: Remortgaging will require a new credit check, and your eligibility will depend on your current financial situation.
• Early Repayment Charges: If you remortgage before your fixed rate term ends, you may face early repayment charges.

Switching to a Tracker or Variable Rate Mortgage

Instead of remortgaging to another fixed rate, you could switch to a tracker or variable rate mortgage. These types of mortgages have rates that fluctuate with changes in the Bank of England base rate or the lender’s own SVR.

Advantages of Tracker/Variable Rate Mortgages:

• Potentially Lower Rates: If interest rates fall, your payments could decrease.
• No Early Repayment Charges: Most tracker or variable rate mortgages don’t have early repayment charges, offering more flexibility.

Disadvantages of Tracker/Variable Rate Mortgages:

• Uncertainty: Your monthly payments can increase if interest rates rise.
• Budgeting Challenges: The lack of fixed payments can make financial planning more difficult.

Staying on the Lender’s SVR

While staying on the lender’s SVR is an option, it’s generally not recommended due to the higher interest rates and the uncertainty involved.

When Staying on the SVR Might Make Sense:

• Short-Term Solution: If you plan to sell your home or pay off your mortgage soon, staying on the SVR might be a convenient short-term option.
• No Fees: There are usually no fees associated with moving to the SVR, as it happens automatically when your fixed rate ends.

Paying Off the Mortgage Early

If you’re in a financial position to do so, paying off your mortgage early could be a viable option when your fixed rate mortgage ends.

Advantages of Paying Off Early:

• No More Monthly Payments: Once your mortgage is paid off, you won’t have to worry about monthly mortgage payments.
• Interest Savings: Paying off your mortgage early can save you a significant amount of money in interest over the life of the loan.

Disadvantages of Paying Off Early:

• Loss of Liquidity: Using a large sum of money to pay off your mortgage could reduce your available cash reserves.
• Opportunity Cost: The money used to pay off your mortgage could potentially earn more if invested elsewhere.

Preparing for the End of Your Fixed Rate Mortgage

Monitor Your Fixed Rate Term

It’s important to keep track of when your fixed rate term is due to end. Many lenders will send a reminder a few months before the fixed rate period expires, but it’s wise to mark the date on your calendar and start planning in advance.

Review Your Financial Situation

Before your fixed rate mortgage ends, take the time to review your financial situation. Consider your income, expenses, savings, and any changes in your financial circumstances. This will help you determine which option is best for you when your fixed rate ends.

Shop Around for New Deals

Start researching mortgage deals a few months before your fixed rate term ends. Compare different lenders and mortgage products to find a deal that suits your needs. Using a mortgage broker can also help you access a wider range of products and potentially secure a better rate.

Consider the Costs of Remortgaging

If you decide to remortgage, be aware of the costs involved. These may include arrangement fees, legal fees, and valuation fees. Some lenders offer fee-free remortgage deals, so it’s worth shopping around to find the most cost-effective option.

Get Your Paperwork Ready

When applying for a new mortgage, you’ll need to provide documentation such as proof of income, bank statements, and ID. Start gathering these documents early to ensure a smooth application process.

What Happens If You Do Nothing When Your Fixed Rate Mortgage Ends?

Automatic Switch to the SVR

If you take no action when your fixed rate mortgage ends, your lender will automatically switch you to their standard variable rate (SVR). This rate is usually higher than the fixed rate you were paying and can fluctuate over time.

Implications of Moving to the SVR:

• Higher Monthly Payments: Your payments are likely to increase when you move to the SVR.
• Uncertainty: Since the SVR can change at any time, it can be difficult to budget for your mortgage payments.
• Limited Flexibility: While you can switch to a new mortgage deal at any time, staying on the SVR means you’re missing out on potentially better rates.

Risk of Payment Shock

One of the biggest risks of moving to the SVR is payment shock, where your monthly payments increase significantly due to the higher interest rate. This can strain your finances and make it more challenging to manage your household budget.

Impact on Financial Planning

Staying on the SVR can also make it harder to plan your finances. The uncertainty of fluctuating payments can affect your ability to save, invest, or meet other financial goals.

Remortgaging After Your Fixed Term Ends

Why Remortgage?

Remortgaging after your fixed rate term ends allows you to secure a new deal that better suits your financial situation. By remortgaging, you can potentially lower your interest rate, reduce your monthly payments, or access additional funds for home improvements or other needs.

How to Remortgage

1. Assess Your Current Mortgage: Review your current mortgage to understand your remaining balance, interest rate, and any fees associated with early repayment.
2. Research New Deals: Use comparison websites, speak to a mortgage broker, or contact lenders directly to explore new mortgage deals.
3. Apply for a New Mortgage: Once you’ve found a suitable deal, submit your application with the necessary documentation.
4. Valuation and Legal Work: The new lender will typically require a property valuation and legal work to transfer the mortgage.
5. Complete the Remortgage: After the legal work is done, your new mortgage will replace your old one, and you’ll start making payments under the new terms.

When to Start the Remortgaging Process

It’s advisable to start the remortgaging process about three to six months before your fixed rate mortgage ends. This allows enough time to research deals, submit your application, and complete the necessary legal work.

Choosing the Right Mortgage Product

When remortgaging, it’s important to choose a mortgage product that aligns with your financial goals. Consider whether you prefer the stability of another fixed rate, the potential savings of a tracker rate, or the flexibility of a variable rate.

Potential Pitfalls of Remortgaging

• Early Repayment Charges: If you remortgage before your fixed rate term ends, you may incur early repayment charges from your current lender.
• Application Rejection: Your remortgage application could be rejected if your financial situation has changed or if you don’t meet the lender’s criteria.
• Higher Fees: Some remortgage deals come with high arrangement fees or other costs that could offset the savings from a lower interest rate.

Final Thoughts on Fixed Rate Mortgages Ending

The end of a fixed rate mortgage term is a critical time for homeowners. The decisions you make can have a significant impact on your financial future. By understanding what happens when a fixed rate mortgage ends and exploring your options, you can make an informed choice that aligns with your financial goals.

Key Takeaways:

• Plan Ahead: Start preparing for the end of your fixed rate mortgage term several months in advance.
• Review Your Options: Consider remortgaging, switching to a different mortgage type, or paying off your mortgage early.
• Seek Professional Advice: If you’re unsure about your options, consider speaking to a mortgage advisor who can help you navigate the process.
• Monitor the Market: Keep an eye on interest rates and mortgage deals to ensure you secure the best possible rate when your fixed term ends.

External Resource

For more detailed information on mortgages and remortgaging, you may want to visit the Money Advice Service for further reading.

By staying informed and proactive, you can make the best decisions for your financial future as your fixed rate mortgage term comes to an end.