WHAT HAPPENS WHEN MY FIXED-RATE MORTGAGE ENDS – AND CAN I REMORTGAGE?

Wednesday May 26, 2021

Borrowers could find themselves hundreds of pounds worse off if they do nothing when a fixed-rate deal ends

Every month tens of thousands of borrowers reach the end of their fixed-rate mortgage deal. In most cases, that means their mortgage payments are set to rise – sometimes by a significant amount.

But you can take action to avert these higher costs. In this article Telegraph Money explains how fixed-rate mortgage deals work – as well as how to get the lowest possible rate and keep your repayments down.

What is a fixed-rate mortgage?

If you take out a fixed-rate mortgage, the interest rate on the deal will be locked in place for a fixed period, whether that be two, three, five or 10 years.

For example, you might get a five-year fixed-rate mortgage charging 1.3pc. You are guaranteed to pay that rate for the whole five-year period, whatever happens to wider interest rates or the economy.

This gives a borrower certainty in knowing how much their monthly mortgage repayments will be in pounds and pence. For many households that is a major help in budgeting. Just a 0.5 percentage point rate rise could add hundreds of pounds to your monthly mortgage bill.

What exactly happens when my fixed rate ends?

Rates that are not fixed are known as variable-rate mortgages. These include tracker mortgages, for example, which track a central rate such as the Bank of England’s Bank Rate.

But the more common variable rates are known as “standard variable rate” or SVR mortgages. These are the rates borrowers move on to at the end of their fixed-rate deal. They are currently far higher than most fixed-rate deals, and may be as high as 4pc or 5pc.

For instance, a lender could offer a two-year fix at 0.99pc, but once the deal ends customers will move to the SVR which is 3.49pc. That’s a difference of £371 a month on a £300,000 mortgage over 25 years.

VRs don’t track the Bank Rate directly, but are instead set by individual lenders and go up or down at their discretion. However they do tend to move more or less in line with wider interest rates.

So if interest rates are on the rise you should expect your SVR to go up sooner or later.

What should you do when a mortgage deal comes to an end? 

You can either do nothing and pay the higher SVR rate or, depending on your circumstances, you could remortgage to a new deal.

Those who want to remortgage to a cheaper deal should approach their existing lender about better rates three to four months before their current deal ends.

Lenders should contact you before your current deal expires, but many customers might overlook these and end up automatically shifting to the SVR without knowing.

If you get an offer from your lender, make sure to compare it against other deals online using best-buy charts or the help of an adviser.

If the value of your property has risen significantly since you took out your mortgage, you’re likely to be eligible for much lower rates, so make sure you shop around before settling on a deal. A quality mortgage broker can help ensure you do not overlook the best possible rates for your circumstances.

Once you pick the best deal you will need to pass the lender’s credit checks and affordability assessment. At that point you’ll be sent a binding offer.

If you have remortgaged with a different lender, a solicitor will take care of the paperwork and a signed deed will be sent to your new provider.

They will then pay off your existing mortgage by sending funds to your current lender, and once the old mortgage has been repaid in full you will start making repayments to the new lender.

When shouldn’t you remortgage? 

While an SVR is for most people not a good idea, SVRs might be beneficial for those who want to make mortgage overpayments.

That is because most SVRs don’t have early repayment charges attached, so you can usually pay off your entire mortgage without incurring any penalty.

If you have a mortgage that is relatively small, say under £50,000, it might not be worth remortgaging if the new mortgage fees outweigh the potential savings. Also, some lenders will not take on small mortgages.

If your circumstances have changed, for example someone in the household has stopped working to look after children, then your income will be significantly lower and you may not be accepted by a new lender.

The same is true if you suddenly have bad credit – a mortgage provider will perform a credit check on you when you remortgage, so any black marks will be visible and they may choose not to lend.

What is a tracker mortgage – and should I get one? 

Trackers tend to follow the Bank of England base rate at a margin above the rate, which currently sits at a record low of 0.1pc. So, for instance, you might pay Bank Rate plus 1 percentage point. You would then pay a rate of 1.1pc.

With variable rates borrowers suffer higher payments when rates go up. The nature of a tracker mortgage means the amount you pay in repayments each month could change, which does not always suit borrowers who want the security of a set budget.

What will it cost to remortgage? 

Remortgaging isn’t cheap – there are a host of charges you could be liable to pay, including product fees (ranging from £500 to £2,000 upfront), valuation fees (usually between £300 to £400), solicitor fees (up to £400 and sometimes more), transfer fees (between £25 and £50) and potentially other charges, too.

If you choose to use a broker this may also incur a fee. But some brokers are free to the borrower and instead make a small commission from the lender once the mortgage goes through.