Two-Year Or Five-Year Fixed-Rate Mortgage? What You Need to Know

Posted 16 July 2018 by Nick Parkhouse

Looking for a fixed-rate mortgage? Our guide looks at the pros and cons of two-year and five-year fixed mortgages...

In recent years, fixed-rate mortgages have been overwhelmingly popular with borrowers. Combining the stability of fixed payments with some of the lowest interest rates ever seen in the UK, it’s perhaps no surprise that millions of borrowers have turned to these products.

If you’re thinking of taking out a fixed-rate mortgage, you’ll need to decide whether to fix for a short term (two years) or the medium term (five years).

With the gap in the cost of these type of deal shrinking to its lowest level since 2013, how do you choose which deal to go for? Keep reading to discover the pros and cons of choosing a two-year or five-year fixed-rate mortgage.

Lowest gap between cost of two- and five-year deals in five years

In the past there has often been a financial reason for choosing a two-year over a five-year fixed-rate deal. Historically, two-year products have been much cheaper than five-year deals, meaning that if you’re main objective is to reduce your repayments, a shorter-term rate will offer cost savings.

However, recent research from financial analysts Moneyfacts has revealed that the gap between the average rate for a two-year fixed-rate mortgage and one that is fixed over five years is now at its lowest level since August 2013.

This means that if you’re looking for long-term security you may only pay a small amount more – around 0.4% – for the privilege.

The main reason for this is that the cost of two-year fixed-rate mortgages has risen over the last few months.

Charlotte Nelson, finance expert at Moneyfacts, says: “With all the uncertainty surrounding a potential base rate rise, the average two-year fixed rate has been on an upward trajectory in the first half of this year, increasing from 2.35% at the start of the year to 2.52% [in June 2018]".

At the same time, the average five-year fixed rate has risen by just 0.05% since January, which has allowed the gap between the two to decrease dramatically. The average two-year fixed rate deal is now 2.52%, with the average five-year fix available at 2.92%.

Why you might want to choose a two-year fixed-rate mortgage

Because of the difference in interest rates, the main reason to choose a two-year fixed-rate product would be because you want to minimise your repayments.

The cost of two-year deals is generally lower than their five-year equivalents, meaning that you’ll often save money by choosing a shorter-term deal. On a £150,000 repayment mortgage over 25 years, choosing the average two-year rate will save you around £30 per month when compared to the average five-year fixed-rate deal.

The other main advantage of choosing a two-year deal is that you have the flexibility to review your arrangements after a couple of years.

Two-year deals will generally only tie you in with early repayment charges during the fixed period. If your personal circumstances are likely to change then having the opportunity to renegotiate your deal without being tied in might suit you.

Why you might want to choose a five-year fixed-rate deal

Over recent months, more and more borrowers are choosing five-year fixed-rate products. Moneyfacts report that the demand for five-year fixed rates has increased to 47%, meaning around half of all new mortgages are now taken out on this basis.

Lenders have also been keen to maintain their market share by offering competitive five-year deals. Charlotte from Moneyfacts says: “Specifically, lenders are hoping to entice borrowers onto a longer-term option by keeping their five-year fixed rate deals competitive, which is why the two-year fixed rates have sped up but the five-year rates haven't.”

While the downside of a five-year deal is that your monthly repayments may be more initially, they could end up saving you money in the long run depending what happens to general interest rates.

There is general agreement that interest rates will continue to rise in the next few years, and so if you do choose a two-year product then rates may be much higher when you come to renegotiate a deal in two years’ time.

Choosing a five-year fix may therefore be a smart gamble to take. You could find that the overall cost of your mortgage over the medium term may be lower if you take a five-year rate, even if it is more expensive initially. That’s because it could be much more expensive to renegotiate a deal two years down the line.

If you are considering a five-year fixed rate then remember that these deals generally have ‘early repayment charges’ for the full five years. So, if you decide to repay part or all of the mortgage during the five-year deal, you could face some substantial charges for doing so.

Ideally, you should only commit to a five-year deal if your personal circumstances are relatively stable and you don’t expect to make any major changes during the fixed period.

Most mortgages are ‘portable’, and so you can normally take your deal with you if you were to move home, assuming you satisfy your lender’s other criteria. Read our complete guide to porting a mortgage.

Consider taking advantage of a low rate now

Whether it’s a two-year or a five-year rate you’re looking at, most experts suggest that you consider fixing your mortgage sooner rather than later in order to take advantage of the excellent deals available.

Nick Chadbourne, chief executive of conveyancing service provider LMS, says: “In the short-term, reports of the Bank of England’s upcoming rate increase is putting pressure on homeowners to move away SVR and remortgage sooner rather than later.

“The longer term increase in lending is due to borrowers being more aware of the potential savings on offer through remortgaging.”

 

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