Whether you are looking to buy your first home, a home mover or are looking to remortgage, the length of the mortgage term you choose will be one of the most financially important decisions you make. Choosing between a two year and five year mortgage deal will not only impact your short-term finances, but will also impact your money for years to come.
Here we take a look at whether you are better locking your mortgage into a two or a five year mortgage deal.
Looking at average two year fixed mortgage rates over the last year, mortgage borrowers will have benefited from a fall in rates. Those who have 40% equity in their home, 60% loan-to-value (LTV), will have seen the average two year fixed rate fall from 1.89% in January 2019, to 1.81% in January 2020. For those with 25% equity in their home (75% LTV) rates also fell over the last 12 months, from 2.4% in January 2019 to 2.3% in January 2020. The biggest drop in rates, however, was for first-time buyers with a 5% deposit (95% LTV), with rates at this tier decreasing from 3.46% to 3.25%.
|95% LTV||75% LTV||60% LTV|
|1 January 2019||3.46||2.4||1.89|
|1 January 2020||3.25||2.3||1.81|
Over the last month, rates have dropped further on all LTVs, now standing at 1.79% on a 60% LTV, 2.27% on 75% LTV and at 3.22% on a 95% LTV. While these are the average rates, the actual rates available to mortgage borrowers in the chart are much lower. The chart below shows the lowest rates available in the two year fixed mortgage charts today on a 60%, 75% and 95% LTV.
|NatWest Int Sols*||1.19 %||60%|
|Newcastle Building Society**||2.59%||95%|
*This deal is only available through selected intermediaries and requires a minimum loan of £100,000.
**Although this is second in the chart, the lowest rate from Progressive Building Society is only available to those located in Northern Ireland.
Average rates in the five year mortgage chart have seen an even bigger decrease in the last 12 months, compared to average two year fixed rates on the same LTV. Average rates for those with 40% equity in their home (60% LTV) have fallen from 2.31% in January 2019 to 2.07% in January 2020. Those with 25% equity in their home (75% LTV) saw rates drop from 2.79% to 2.59% year-on-year, while first-time buyers with a 5% deposit (95% LTV) again saw the biggest fall from 3.86% to 3.56% over the 12-month period.
|95% LTV||75% LTV||60% LTV|
|1 January 2019||3.86||2.79||2.31|
|1 January 2020||3.56||2.59||2.07|
Interestingly, the only LTV in the two and five year fixed chart that saw average rates increase over the last month was a five year fixed deal on the 60% LTV, where it increased to stand at 2.11% today. The 75% LTV average rate has fallen over the last month to stand at 2.55% today, while the 95% LTV average rate has also decreased to 3.53% today. As with the two year fixed rate mortgages, the actual rates on offer are much lower than the average rates. As borrowers can see from the below table, the lowest rates available in the five year fixed chart on a 65%, 75% and 95% today are 1.49%, 1.59% and 2.75% respectively.
*This is a springboard deal that requires a Helpful Start Account and has additional terms and conditions.
Comparing average rates shows that two year fixed mortgage deals offer lower rates than those in the five year fixed chart. However, when trying to decide whether to opt for a five year or a two year deal, borrowers need to take into account a number of other factors. For example, the two year fixed rates are lower than the five year rates, but with rates currently at a historic low, borrowers need to determine whether they are prepared to take the risk of a two year deal, which could mean remortgaging at a higher rate in two years’ time, and potentially paying more mortgage fees, or locking into a low five year deal now.
Furthermore, borrowers need to consider lifestyle changes that may happen over the next few years – for example those who think they may move within the next few years, may only want a shorter-term mortgage, while those who are planning to stay in their current home and start a family may prefer to know what they will be paying for their mortgage for a five-year period.
Eleanor Williams, finance expert at Moneyfacts.co.uk, said: “There are so many factors to take into account when making a decision about your mortgage deal; not only thinking about whether you believe interest rates may go up or down in the future, but also considering what might change within your own circumstances as well. This is why it is so important to speak to an independent, qualified financial adviser, as they will help you to navigate making the choice that will work best for you overall.”
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