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Fixing a mortgage for 3 years means you’ll be able to rest easy with the knowledge that your mortgage rates and repayments will not creep up during the 3-year term.
No matter what external economic factors are occurring or what happens with the Bank of England’s (BOE) monthly interest rate decision, a 3-year fixed rate mortgage won’t give you any repayment surprises.
As with any financial product, there are some drawbacks to a fixed mortgage, including lack of flexibility and early repayment fees or break costs if you repay your loan before the fixed period ends.
As the name implies, this is a mortgage which has a rate fixed for three years. Most banks and lenders across the UK will offer a three-year fixed rate mortgage. This is because it’s a great mix of security and length: three years is long enough to reap the benefits of a competitive rate, but short enough to give you the flexibility to change loans if you find that a fixed rate isn’t for you.
Once the three year period ends, two things can happen. Firstly, your loan could revert to the standard variable rate (SVR) offered by your lender unless you choose otherwise, or secondly, your lender may approach you to fix an interest rate for another term. In most cases your lender will notify you when your fixed period is close to ending so you can make a decision. If they don’t, ensure you set a calendar reminder well before the fixed rate ends so you can decide on what you’re going to do.
Each month, the Bank of England (BoE) sets the base rate, which is the interest rate set by BoE for lending to other banks, and is used as the benchmark for interest rates generally. This, as well as other economic factors, can have a bearing on what your lender decides to do with mortgage rates.
If the rates go down, those with variable rate loans could see their repayments go down too; however, if rates go up, variable rate borrowers could be paying more.
A fixed rate mortgage protects borrowers against rising rates. You lock in a rate with your lender, and then for the duration of that term your rate stays the same.
Unfortunately a side-effect of this is that a fixed rate mortgage is less flexible and has extra fees compared to its variable rate cousin.
Fixed rate mortgages can come with expensive break fees if you decide to leave the loan early.
They’ll also usually be missing features like 100% offset accounts. If they allow you to make additional repayments these will usually be capped off at 10% of your mortgage balance annually, rather than unlimited like most variable rate mortgages.
Just like regular variable rate loans, fixed rate mortgages come in a range of different types, with these types aimed at different borrowers. It’s important to note too, that 3-year fixed rate mortgages also come in low documentation variants to suit those who are self-employed, as well as bad credit variants. Keep in mind that these two types of fixed rate mortgages might come with higher fees or rates, so ensure you carry out a comparison before applying.
These mortgages are your foundation mortgages. They don’t have the frills and additional features that other mortgages have, but they do offer very competitive rates and fees. Basic mortgages are a good way to help you save money, especially if you don’t require any additional features.
It can be difficult for those with a bad credit rating to be successful in their mortgage applications. Fortunately, there are fixed rate mortgages available for those with bad credit. You may be charged a higher rate or fee with this type of mortgage to compensate for your credit risk.
These are typically referred to as self-employed mortgages. As the name suggests, these are for those who are self-employed or investors who are unable to provide proof of income through pay slips and bank statements. Instead, self-employed borrowers will have provide form SA302, which is how you declare the amount of money you’ve earned to HMRC.
A three-year fixed rate mortgage can be compared using the same factors as a regular mortgage, but there are a few additional points to consider.
If you want to make the most of low interest rates and lock in your mortgage rate for a set time, a 3-year fixed rate mortgage could be a good choice. Offering a decent amount of security than a 2-year fixed rate deal, but not requiring you to lock in for as long as 5 or 10 years, a 3-year deal could offer a good compromise. Just remember that you will have to pay an early repayment charge if you get out of your deal early.
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