What interest rate will apply when your fixed-rate mortgage period ends? And how do you make sure you don’t pay more than you have to?
If you’ve taken out a fixed-rate mortgage, your interest rate is locked in for a fixed period. In other words, the interest rate - and consequently your monthly mortgage repayment - will remain unchanged for an agreed number of years.
But all good things come to an end. Even fixed-rate terms on mortgages. And, when this happens, you could find yourself paying your mortgage provider more than you bargained for.
In this article, we explain what happens when the fixed rate period on your mortgage expires and discuss what you can do to make sure you don’t pay more than you have to.
What are your choices when your fixed rate period is up?
If the fixed-rate period on your mortgage is about to end, you have two choices: 1) do nothing; or 2) look for a new mortgage deal.
Option 1: do nothing
If you do nothing when the fixed-rate period on your mortgage ends, you’ll be automatically switched to your mortgage provider’s standard variable rate, or SVR. This is your mortgage provider’s ‘default’ rate. And, as the name suggests, it’s variable, which means it can change from time to time.
Standard variable rates: the pros
- No early repayment charges
Early repayment charges tend to end with the fixed-rate period. This means that, once you’re on the SVR, you won’t be penalised for making mortgage overpayments. You can usually also pay off your entire mortgage or switch to another deal without incurring an early termination fee.
- The interest rate can go down
Since the rate is variable, there’s a chance it might go down. If this happens, your monthly mortgage repayment may also go down.
Of course, an SVR may also go up, in which case your mortgage could become more expensive.
Standard variable rates: the cons
While SVRs can go down, they’re usually higher than other types of interest rate to begin with. This means they’re unlikely to be the best deal out there.
Unlike other types of variable interest rate, SVRs don’t track the Bank of England’s base rate. Instead, they’re set by individual mortgage providers and go up or down at their discretion. In general, SVRs do tend to be tweaked to reflect changes in the base rate. However, there’s no guarantee that this will happen. An SVR may remain unchanged even if the base rate goes down.
According to uSwitch, discounted or tracker variable rates - that is rates that follow the Bank of England’s base rate - were as low as 0.98% in May 2017. And fixed rates were quite close, starting at 0.99% for two years. By contrast, SVRs were around 4.5% or higher.
Option 2: look for a new mortgage deal
If your fixed rate period is about to end, it’s worth evaluating your current mortgage and at least considering a switch. At the time of writing, interest rates are at an all time low. This means there’s a good chance a new mortgage will be cheaper than staying on your current one and paying the SVR.
For best results, it’s a good idea to start looking at new mortgage deals about 14 to 16 weeks before your fixed-rate period expires. This will allow sufficient time for the paperwork to get sorted. That way, you can switch straight to your new mortgage without ever paying the SVR.
That said, remortgaging may not be right for you if:
- The amount outstanding on your mortgage is very small
Your new mortgage provider will usually charge a booking fee and an arrangement fee. If you’ve only got a little left to pay, any savings you stand to make on interest may be outweighed by these fees.
- Your circumstances have changed
Your new provider will want to carry out an affordability assessment and a credit check. If your circumstances have changed - for instance you’ve had children, become self-employed or had trouble paying your debts - a new lender may be less willing to approve your application.
If you’re unsure, you can test the waters with a soft search. Alternatively, consider speaking to an independent financial advisor.
How to remortgage: a step-by-step guide
Remortgaging is usually more straightforward than getting your first mortgage. Here’s how the process works:
- Compare mortgage deals
Your current provider is a good starting point, but it’s good to shop around as widely as possible.
Aside from the interest rate and applicable fees, you’ll also want to consider whether to take out another fixed-rate mortgage, a variable rate mortgage or some other type of mortgage. Our mortgage guides can help you get a better idea of what’s out there.
- Pick a deal and apply
If you pass the provider’s credit checks and affordability assessment, you’ll be sent a binding offer.
You don’t typically need to pay a deposit. Instead, you borrow against the equity in your home. This is the part of your home you own outright, because you’ve paid off a chunk of your mortgage.
- Appoint a solicitor to act on your behalf
Your solicitor will take care of the title deed transfer and all other necessary paperwork.
- Sign the new mortgage deed
The signed deed is sent to your new mortgage provider. In turn, your new provider will pay off your existing mortgage by releasing the funds to your current lender.
- Start making repayments on your new mortgage
Once your old mortgage has been repaid, you’ll start making repayments to your new provider.
Seeing your mortgage deal end opens up some interesting possibilities. Doing nothing is an option, but it could be worth researching what else is out there as you might find there's money to be saved.