Guide

What happens at the end of my fixed rate deal?

When you take out a mortgage with a fixed interest rate, most of your attention is, quite naturally, on the here and now. The monthly payment, the deposit, the process of buying the property. The end of your fixed rate period feels far away.

But it arrives faster than most people expect. And when it does, what you do next has a significant impact on how much your mortgage costs you.

Here is what you need to know.

What happens when your fixed rate ends?

Your fixed rate deal lasts for the period you agreed at the outset, typically two, three, or five years. When that period is over, your mortgage does not disappear. The remaining balance is still there, and you still need to keep making payments.

What changes is the interest rate.

Unless you have taken action before the end date, your lender will automatically move your mortgage onto their Standard Variable Rate, known as the SVR. This happens quietly, without fanfare, on a specific date. If you have not arranged a new deal by then, the SVR is simply what you pay from that point onward.

What is the Standard Variable Rate?

The Standard Variable Rate is the default interest rate that a lender charges when a borrower is not on a specific deal. Every lender sets their own SVR, and they can change it at any time. It is not directly tied to the Bank of England base rate, though it often moves loosely in relation to it.

The important thing to understand is that the SVR is almost always higher than the rates available to new or remortgaging customers. Significantly higher, in many cases.

The reason is straightforward: borrowers on the SVR are, in effect, the path of least resistance for the lender. There is no competitive pressure to offer them an attractive rate, because they have not yet gone to the effort of remortgaging. Lenders reserve their most competitive pricing for borrowers who are actively choosing them.

The result is that staying on the SVR is usually expensive. A borrower who moves from a 4.2% fixed rate onto an SVR of 6.5% or 7% will see their monthly payment jump considerably, sometimes by hundreds of pounds.

How much could it cost you?

Let us make this concrete. Suppose you have £180,000 outstanding on your mortgage with 20 years remaining. You have been paying 4.2% on a fixed deal. Your monthly payment has been around £1,106.

If your mortgage moves onto an SVR of 6.75%, your monthly payment rises to approximately £1,360. That is an extra £254 every month, over £3,000 per year, for no additional benefit whatsoever.

Over two or three years of being on the SVR without taking action, that is potentially £6,000 to £9,000 of avoidable expense.

What should you do instead?

The answer is to remortgage before your fixed rate ends.

Remortgaging means switching to a new mortgage deal, either with your existing lender or with a different one, before you reach the SVR. By doing so, you secure a new competitive rate and your monthly payment stays manageable.

The best time to start looking at your options is around three to six months before your current deal ends. Most lenders allow you to secure a new rate up to six months in advance. This means you can lock in a deal early, protect yourself against rates rising before your end date, and then switch across seamlessly when the time comes.

If rates fall between the point you secure your new deal and your start date, many lenders will allow you to switch to a better rate before it begins. It is worth asking your adviser about this when you are remortgaging.

Should you stay with your current lender?

Not necessarily. Your existing lender will usually offer you a product transfer, a new deal on the same mortgage without the need for a full application. This can be convenient, and the rates offered can sometimes be competitive.

But convenient and competitive are not always the same thing. A product transfer only shows you what your current lender is offering. Remortgaging to a new lender opens up the entire market, and there may be deals available elsewhere that your current lender simply cannot match.

The only way to know which is better for you is to compare both options, your lender's retention deals and the wider market, at the same time. This is exactly where a mortgage adviser adds value. They can do that comparison quickly and tell you where the best deal sits.

What if your circumstances have changed?

A lot can change in two or five years. Your income may have grown. You may have had children. You may be self employed now when you were not before. The property may have increased in value, improving your LTV and potentially unlocking better rates.

Any of these changes can affect which lenders will consider you and on what terms. A full remortgage assessment takes your current circumstances into account, which means you are not simply rolling onto the same deal you had before: you are applying fresh, based on who you are and what you own today.

This can work in your favour. If your income has risen and your property has gone up in value, you may find yourself eligible for significantly better rates than you originally had access to.

What if you do not remortgage in time?

If your fixed rate ends before you have arranged a new deal, you will sit on the SVR temporarily. This is not a disaster, and in some cases where rates are changing rapidly, it can even be appropriate to be on the SVR briefly while you wait for conditions to settle.

But it should be a deliberate decision, not a default. If you are on the SVR, be aware of it, monitor your lender's rate, and have a plan for when you will switch.

A note on Early Repayment Charges

If you want to remortgage before your fixed rate ends, you will almost certainly face an Early Repayment Charge from your current lender. These charges are typically between 1% and 5% of the outstanding balance, and they exist to compensate the lender for the interest they expected to receive over the remaining fixed term.

Early Repayment Charges mean it is usually not worth remortgaging mid term unless rates have fallen dramatically or your circumstances have changed significantly. The maths rarely works in your favour when you factor in the exit cost.

Once you are within the final few months of your term, however, most lenders stop charging Early Repayment Charges, and you can begin your switch without penalty.

It is one of the most straightforward ways to save a meaningful amount of money on your mortgage, and it is worth building it into your diary well in advance.

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This article is for informational purposes only and does not constitute financial advice. Always speak to a qualified mortgage adviser before making decisions about borrowing.