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Short Term Fixed Rate Mortgages

Short Term Fixed Rate Mortgages

Whether you’re buying your first home, moving house or simply remortgaging for a better deal, we’ve put together a guide to help you decide whether a short term fixed rate mortgage is right for you.

Kelly Whybrow Content Writer
minute read

What is a short term fixed rate mortgage?

A short term fixed rate mortgage is when the interest on your mortgage is fixed at a set interest rate for an agreed period of time, varying from 1-10 years.  

The vast majority of new mortgages are on fixed interest rates, typically for two, three or five years. Fixed rate mortgages can occasionally cover ten years, although the longer the term, the more interest you’ll have to pay.

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How do they differ from a variable rate mortgage?

With a variable rate mortgage, the interest rate charged on borrowing the capital can move as it is not set at an agreed rate. There are a number of different types of variable mortgages:

  • Tracker mortgages: the most common type of variable mortgage is Bank of England Base rate tracker mortgage. This moves in line with changes in the Bank of England base rate e.g. if it charges you 1% over the Bank of England rate (currently 0.75%) your interest rate would be 1.75%. If the Bank of England rate changes e.g. to 1% your interest rate would be 2%.  
  • Standard variable mortgage: another common type is a provider’s standard variable rate (SVR). This is the rate that mortgages move onto once the agreed fixed or tracker period has ended.

What are the benefits of a short term fixed rate mortgage?

The biggest benefit of a short term fixed rate mortgage is that the interest you pay will be fixed for the term of your deal so:

  • It won’t go up if the Bank of England Base rate or interest rates in general rise.   
  • You can budget with certainty for that period
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What I need to know about interest rates

If you’re a first-time buyer, your deposit is likely to be between 5% and 10% which means your interest rate is likely to be higher. The larger your deposit, the better fixed rate interest you can get. The fixed rate interest on 2 year deals start from 1.84% on a 10% deposit, and 5 year deals from 2.24%.  

Rates are expected to rise after the latest announcement from the Bank of England as they have increased interest rates by 0.25 percentage points from 0.5% to 0.75% (August 2018). These rises can be expected to leak through to mortgage rates, increasing the cost of borrowing.

What do I need to watch out for with a short term fixed rate mortgage?

  • If you find yourself with extra cash and want to repay your mortgage early, there are likely to be limits to the amount you can repay each year as well as early repayment fees on a fixed rate mortgage..
  • At the end of the fixed-rate period your mortgage will likely revert to the lenders ‘standard variable rate which is normally much higher than fixed rates ’. You can of course arrange a new deal when your fixed rate deal comes to an end by comparing mortgages at Compare the Market.
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  • Fixed rate mortgages can have higher arrangement fees, typically between £1,000 and £2,000.  However, the Annual Percentage Rate of Change (APRC) that you’ll see quoted takes into account these fees. The APRC is the total cost of the credit to the consumer, expressed as an annual percentage.

How can I find a good deal on a short term fixed rate mortgage?

We have a wide choice of fixed rate deals. Comparing really couldn’t be easier so let us do the hard work for you and see how much you could save using our mortgage comparison tool.

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