Compare the best 3-year fixed rate mortgages UK 2023

With the Bank of England (BoE) base rate having risen sharply from its record low of 0.1% in March 2020, mortgage rates are now following suit and rising from their lowest ever levels. If that’s got you thinking of locking into a low rate deal, here’s what you need to know about 3-year fixed rate mortgages.

Fixing a mortgage for three 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.

What’s a 3-year fixed rate mortgage?

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.

How does a 3-year fixed rate mortgage work?

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.

What types of 3-year fixed rate mortgages are available?

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.

Basic mortgages

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.

Bad credit mortgages

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.

Loans for the self-employed

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.

How to compare 3-year fixed rate mortgages

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.

• Rate. The interest rate isn’t always the most important indication of whether or not a mortgage is the best choice for you, but it will have a large bearing on how expensive your repayments will be. Also, keep in mind that the advertised interest rate will not take fees into account, so take a look at the comparison rate too.
• Ability to make additional repayments. This won’t be important for all borrowers, but keep in mind that not all fixed rate mortgages will allow you to make additional repayments. The ones that do may come with an annual limit, so if you think you’ll be making additional repayments during the year, ensure that your loan will allow you to.
• Fees. Compare the establishment, valuation, legal and other upfront costs when comparing three-year fixed rate mortgages.
• Other features. These may be important depending on what you plan to do with your mortgage. These include interest-only repayment options, and the maximum length of the interest-only period; offset accounts and whether they’re 100% or partial offset accounts; and what repayment options the lender will give you.

Pros and cons of a 3-year fixed rate mortgage

The Bottom line

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.

Frequently asked questions about mortgages fixed for 3 years

• What does interest in advance mean?

  Some fixed mortgages also give borrowers the chance to pay their interest for the year in advance. This has the benefit of allowing investors to claim some of this interest back as a tax deduction. Ensure you seek the services of an accountant before employing this strategy.

• Should I get a fixed or variable rate mortgage?

  This question depends on you and your lifestyle. It also depends on what you plan to do with your mortgage in the future.

• Are rates going to rise or drop in the future?

  This question is best answered by an expert broker or economist.

• Can you get a 100% offset account with a fixed rate mortgage?

  Yes, some fixed rate loans today allow you to add a 100% offset account to it to help you save in interest.

• What's the difference between a partial and a 100% offset account?

  With a 100% offset account, the whole amount in the offset account offsets the interest on your mortgage. For example, £10,000 in your offset account on a mortgage of £250,000 will see your interest calculated on only £240,000. A partial offset account won’t use the full amount in your offset account. In some cases, it may use 50% of the funds in your account, meaning an offset account with £10,000 on a mortgage of £250,000 will see the interest calculated on a loan amount of £235,000 rather than the £240,000 given in the first example.