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Fixed rate mortgages have the benefit of allowing borrowers to know exactly how much their repayments will be for the initial term chosen, which can be ideal for those who like to budget, and are particularly suitable during periods of uncertainty where there’s the chance mortgage rates could rise. The question is, how long do you want to fix your mortgage for?
Two year mortgages fix the initial rate for the first two years, after which borrowers are free to remortgage to a different deal, or they can revert to their lender’s standard variable rate (SVR). Throughout that initial term, the rate will remain unchanged and so, too, will the monthly repayments.
This means borrowers will know exactly what they’ll be paying out for the next two years, allowing them to budget effectively and avoid the impact of any impending rate rises. As an added bonus, rates are generally lower for two-year deals than for mortgages with a longer initial term, so if you’re looking for the best mortgage rates possible, two-year deals are likely to be your first port of call.
Most fixed rate mortgages will allow you to overpay to some extent, typically by up to 10% each year, which is great news for those who want to reduce their mortgage balance and interest payments over time. This is true of two-year deals, and if borrowers have the capacity to repay more, they’ll only have to wait for two years to do so without being hit by early repayment charges.
The drawback of only fixing your mortgage for two years, however, is the short-term nature of the deal. After those two years are up you’ll have to either remortgage – and will typically have to pay another mortgage fee – or revert to your lender’s SVR, which is usually far higher than the initial rate. There’s the chance that fixed mortgage rates could rise substantially within those two years, too, meaning borrowers will soon have to pay a far higher rate (and therefore higher repayments) than they’ve been accustomed to, even if they remortgaged.
When you’re searching for a new mortgage deal, make sure to take factors other than rate into consideration, including any fees and incentives. This will give the true cost of the mortgage, and offers a better method of comparison.
The key benefit of five-year mortgages can also be their downfall for some borrowers – the longer-term security tends to come at a higher price, with rates for five-year typically higher than for their two-year counterparts. That said, the gap between the two has been falling recently, and for many, the slightly higher rate could be a small price to pay for the greater level of security involved.
This may be especially true given current uncertainty. There’s no telling what will happen to interest rates in the coming years, though expectations are that they’ll start rising, so those who want to avoid paying higher rates in two years’ time may prefer to fix their rate (and their repayments) for longer. There’s the added benefit that you’ll only pay one mortgage fee in those five years, rather than the two you could be faced with if you opted for a shorter term, which can all help the budget.
In any case, providers are actively looking to compete in the five-year sector at present, which means borrowers may be pleasantly surprised by the rates on offer. Repayments could therefore be surprisingly low, and will be fixed for five years, giving longer-term peace of mind.
The question over which type of mortgage to go for, then, entirely depends on the borrower’s individual circumstances. Those who are focused on securing the lowest rates possible will probably want to look at the two-year sector, while those preferring longer-term security may want to opt for the slightly higher rate of a five-year deal. It all comes down to your individual circumstances – check out the best mortgage rates available to get an idea of what’s on offer.
Our mortgage calculator helps you to see how much your mortgage might cost you each month.
Our how much can I borrow calculator gives you a range of how much a lender might consider lending you under a mortgage. This calculation is only an indication only.
Read our How much can I borrow for a mortgage guide to find out more about what can impact your potential sum of borrowing.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.