You secured a mortgage with an attractive fixed interest rate for the first 5 years. But what happens when your initial rate period ends? You would want to know: will my mortgage payment go down after 5 Years?
Most mortgages in the UK have 2-5 year fixed rate terms before converting to a variable rate. When your special rate period ends, your lender typically shifts you to their Standard Variable Rate (SVR). This benchmark rate fluctuates based on the Bank of England base rate and lender policies.
So can you expect lower monthly bills after your multi-year fixed rate expires? Or will you pay more?
The outcome depends on several key factors.
Key Takeaways
- When an initial 2, 3, or 5-year fixed rate mortgage term finishes, the loan typically moves to the lender’s higher Standard Variable Rate (SVR), meaning payments often rise.
- Factors like interest rate changes, outstanding balance, lender policies, and ability to switch lenders or re-fix impact if post-fixed rate mortgage payments decline, increase, or stay the same.
- Strategies to reduce future mortgage payments include overpaying during the fixed period to owe less principal, shopping new lender rates 6-12 months before the existing deal expires, boosting your credit score to access better loan pricing, and considering longer subsequent fixed rate terms.
- Paying down extra principal on a mortgage while rates are temporarily low ensures you owe less at higher interest rates later, saving on total interest paid.
- Locking into a fresh fixed interest rate deal before an introductory offer finishes provides certainty about future payment amounts for improved budgeting.
- Being proactive leading up to the end of a fixed rate term by overpaying, rate shopping, and comparing lender offers will pay dividends for both short-term and long-term mortgage costs.
Fixed Rate Period Ends
When your 2, 3 or 5 year fixed rate term concludes, you move to your lender’s SVR. This means:
- Your interest rate and mortgage payments can increase, sometimes significantly
- You lose the security of locked-in, predictable bills
- Greater uncertainty about future rate moves and payment amounts
For example, one lender’s current SVR is 5.19% compared to 2-year fixed rates offered around 3.5%. Mortgage payments based on higher interest rates mean you owe extra every month unless you take action.
Some scenarios where SVR is set:
| Basis of Standard Variable Rate | Example |
|---|---|
| Bank of England Base Rate + Lender Margin | Base Rate 0.75% + Margin 4.44% = 5.19% SVR |
| Related to Libor/Swap Rates | 5-year Swap Rate + Lender Cut |
Fluctuations in the Bank of England base rate, Libor/Swap rates, and lender margins mean your SVR changes over time. This trickles down into adjustments to your mortgage bills.
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Factors That Influence Mortgage Payments
Several elements determine if your post-fixed rate mortgage payments decrease, increase, or remain the same:
1. Interest Rates Environment
What’s happened with interest rates since you began your fixed rate term?
If the Bank of England base rate is lower now, SVR may be lower too. This means cheaper financing costs once your term expires.
However, the opposite can occur. Your SVR could exceed your previous fixed rate if the base rate climbed during your 2, 3 or 5-year term.
As an example, a borrower who fixed at 2% for 5 years would see payments jump if the SVR eventually equals 5%.
2. Outstanding Mortgage Balance
The amount still owed on your mortgage also affects affordability when shifting to SVR.
For instance:
- Owing £100,000 means lower monthly bills than owing £250,000
- Paying down your principal via lump sums during the fixed term reduces future interest
Crunching the numbers on potential payment amounts based on what you still owe is wise.
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3. Lender Policies
Banks and building societies set their own SVRs according to business needs. One lender’s SVR may differ substantially from another’s.
They also run promotional offers with rates below the SVR to attract new customers. You may find better incentives as an external borrower.
4. Ability to Switch Lenders or Re-Fix
Most lenders allow borrowers to move to a new deal 3-6 months before the current one ends with no early repayment charges.
You can also re-fix with your existing lender or find a new provider to lock in low rates again. This route may secure better longer-term savings than sticking to an elevated SVR.
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Ways To Reduce Mortgage Payments
You’re not necessarily stuck with higher bills after your multi-year fixed rate finishes. A bit of preparation can minimise the payment spike.
1. Overpay During Fixed Rate Term
Paying extra during special rate periods reduces your loan-to-value (LTV) ratio. This means owing less principal when your term expires.
You can overpay by:
- Increasing your usual monthly mortgage amount
- Making one-off lump sum payments
- Setting up a formal overpayment arrangement (usually up to 10% of outstanding balance per year)
The more you repay now, the less interest you accrue later.
2. Shop New Lender Rates Months In Advance
You can assess alternatives 6-12 months before your existing deal finishes.
Securing a fresh fixed rate or discounted SVR with another lender can prevent payment jumps. New customer rates are often lower.
Locking in early provides certainty about your future mortgage costs, allowing better budgeting.
Building societies and challenger banks often offer competitive incentives too.
3. Improve Your Credit Rating
Good credit means better mortgage rates from lenders. Steps to boost your score include:
- Pay all bills on time – builds up positive history
- Close unused credit cards – lowers unused credit ratio
- Correct mistakes on your credit file
- Register to vote at your current address
Even small score gains can expand your lender options.
Table summarizing credit rating factors:
| Factor | Impact |
|---|---|
| Making loan payments on time | Increases score |
| High credit utilization | Lowers score |
| Multiple credit checks | Lowers score |
| Long credit history | Increases score |
4. Lengthen Your Next Fixed Rate Term
Rising interest rates are predicted over the next 5 years. Extending your next fixed rate mortgage term secures protection for longer.
| Term | Benefit | Risk |
|---|---|---|
| 2 years | Lower rate than 5 years | Rates likely higher in 2 years |
| 5 years | Avoid rate rises for longer | Higher rate than 2 years |
| 10 years | Payment stability for decade | Much higher rate than 2/5 years |
As the table shows, the longer your fixed term, the higher your starting rate. But longer terms avoid uncertainty for longer.
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Conclusion
So will your mortgage payment decrease when your multi-year fixed rate expires?
Unfortunately payment drops are unlikely due to most lenders shifting borrowers to higher Standard Variable Rates month-to-month.
However, overpaying your mortgage principal now, shopping early for new fixed deals, and boosting your credit score can offset increases.
Being proactive leading up to expiration of your fixed rate period will pay off both now and for the long-term future of your mortgage.
Daniel, a seasoned professional with over 5 years of experience in banking, property, and finance, brings a wealth of expertise to the table. This authoritative blog is meticulously curated to provide you with the most up-to-date financial insights. Delving into the dynamic realms of banking and mortgages, Daniel’s passion for finances shines through every post.
