What Happens When My Fixed-Term Mortgage Ends?

A fixed-term mortgage provides a consistent interest rate for a predetermined period, often 15 or 30 years. This arrangement ensures stable monthly payments, offering financial predictability. As this term approaches its conclusion, homeowners must consider their mortgage arrangements. The expiration of the fixed-rate period compels homeowners to make an informed decision about their remaining mortgage balance.

Exploring Your Options

When a fixed-term mortgage concludes, homeowners have three primary paths for their outstanding loan balance.
One common choice is to refinance, securing a new loan to replace the current one. This new mortgage can come with different terms, a new interest rate, or a different loan type, allowing homeowners to adjust their monthly payments or loan duration. The decision to refinance often hinges on prevailing interest rates and a homeowner’s financial goals.

Another path involves allowing the mortgage to revert to the lender’s Standard Variable Rate (SVR). This is typically the default outcome if a homeowner takes no explicit action at the end of their fixed term. An SVR is an interest rate set by the lender that can fluctuate based on market conditions, meaning monthly payments may increase or decrease over time. Homeowners who opt for this route often do so due to convenience or if they plan to sell their home in the near future.

The third option is to fully pay off the remaining mortgage balance. This involves settling the loan, eliminating all future mortgage payments and interest charges. Homeowners might choose this option if they have accumulated significant savings, received a large sum of money, or wish to become debt-free. Paying off the mortgage provides complete ownership of the property without ongoing financial obligations to a lender.

The Process of Moving Forward

Executing any mortgage option at the end of a fixed term involves distinct steps.

Refinancing

For homeowners considering refinancing, gathering documentation is the first step. This includes recent pay stubs, W-2 forms from the past two years, and tax returns for the past two years to verify income. Lenders also require bank statements, current mortgage statements, and details about property taxes and insurance to assess financial standing and property value.
Once these documents are compiled, the process begins with submitting an application to a lender. The lender will likely order a property appraisal to determine its current market value, followed by an underwriting process where financial health and property details are reviewed. If approved, the final step involves closing, where all loan documents are signed, and closing costs, which can range from 2% to 5% of the loan amount, are paid.

Reverting to Standard Variable Rate (SVR)

For those whose mortgage will revert to an SVR, understand the terms of the lender’s SVR. This information is usually available on the lender’s website, within existing mortgage agreements, or by contacting their customer service department directly. Reverting to SVR is automatic if no other option is pursued. Payments will then adjust according to the fluctuating SVR, typically with a notification from the lender.

Paying Off the Mortgage

Homeowners planning to pay off their mortgage must first request a final payoff statement from their lender. This statement provides the amount required to settle the loan, including any per diem interest. The next step involves submitting this amount, usually via wire transfer or certified check. Following the final payment, the homeowner should expect to receive a mortgage discharge or satisfaction of mortgage document, which formally releases the lien on the property.

Making an Informed Decision

Choosing the appropriate path when a fixed-term mortgage ends requires an evaluation of financial and personal factors.

Interest Rate Environment

One primary consideration is the prevailing interest rate environment and how it compares to the current mortgage rate, new refinance rates, or the lender’s Standard Variable Rate (SVR). If market rates are lower than the existing rate, refinancing could lead to savings on interest over the life of the loan. Conversely, if rates have risen, remaining on an SVR might result in higher monthly payments, impacting the household budget.

Personal Financial Situation

A homeowner’s personal financial situation plays a role in this decision-making process. Factors such as income stability, credit score, and the amount of equity built in the home influence eligibility for refinancing terms. A good credit score can secure lower interest rates on a new loan, while home equity can reduce the loan-to-value ratio, making refinancing appealing. The ability to afford new payments or a lump sum payoff also dictates the feasibility of each option.

Future Plans for the Property

Future plans for the property also influence the decision. Homeowners who intend to stay in their home for longer might find refinancing beneficial, as the initial closing costs can be recouped over time through lower monthly payments. Conversely, those planning to sell the property in the near future may find that the costs associated with refinancing outweigh the benefits, making a temporary SVR or a full payoff more suitable. Understanding the timeframe for remaining in the home helps align the mortgage strategy with long-term goals.

It is also important to consider the associated costs of each option, beyond just the interest rate. Refinancing involves closing costs, which can be thousands of dollars, while an SVR might expose the homeowner to unpredictable payment fluctuations. Proactive planning and open communication with the mortgage lender are steps in navigating these choices. Engaging with the lender several months before the fixed term expires allows homeowners to explore their options and understand the implications for their financial situation.