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Mortgages – the two-year fixed rate gamble

Mortgages – the two-year fixed rate gamble

Category: Mortgages

Updated: 13/06/2016
First Published: 13/06/2016

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Fixed rate mortgages have become increasingly competitive in recent years thanks to Government lending initiatives and a low bank base rate. However, rates cannot stay at their record lows forever, so are buyers right to continue to gamble on a short-term mortgage instead of a five-year fix?

The latest research from Moneyfacts suggests that they may not be, and in fact, the figures show that buyers could save thousands of pounds by choosing a competitively priced five-year fixed mortgage over a two-year deal.

For example, compared with the lowest five-year fixed rate mortgage, someone borrowing £200,000 over 25 years would pay up to £8,428 more in capital and interest repayments over the first five years by taking out the lowest two-year fixed deal at 1.14% (from Yorkshire Building Society), which then rolls onto a Standard Variable Rate (SVR) of 4.99%.

Even if borrowers fixed to another two-year deal after the first one expires – see the example below – they may not be any better off; rates could rise in the interim, which would push up the cost of their monthly repayments.

Borrowing £200,000 over 25 years (Rates shown would be charged over the first five years of the mortgage deal) Total mortgage repayments over the first five years
1.14% fixed for 2 years, then 4.99% SVR for 3 years £59,233
1.99% fixed for 5 years (from Halifax) £50,804
Difference £8,428
1.14% fixed for 2 years, then fix to 2.58% for 2 years, then 4.99% SVR for 1 year £53,234
1.99% fixed for 5 years £50,804
Difference £2,429
Source: 13/06/2016

"The market is full of uncertainty, and for that reason borrowers may find themselves better off with a five-year fixed rate mortgage rather than a two-year option," explains Rachel Springall, finance expert at Moneyfacts.

This uncertainty can be particularly seen in terms of base rate movement and the upcoming referendum, not to mention the cut-off point of the Funding for Lending Scheme in 2018, which will see the cheap money lenders have had access to for four years dry up – and it could cause interest rates to rise as a result.

Indeed, "the mortgage sector is likely to start changing well before the Bank of England increases base rate," said Rachel, while first-time buyers also need to prepare for the end of the Help to Buy Mortgage Guarantee scheme later this year.

"Deals offered under this scheme will gradually fade away over the next six months, which could prompt lenders outside the scheme to begin to raise their interest rates for first-time buyers. Prospective buyers would therefore do well to weigh up their options now," added Rachel.

"For those borrowers who are concerned about market fluctuations, a five-year fixed mortgage offers some much-needed security. After all, there are many changes to the mortgage market expected over the next few years, and interest rates are much more likely to rise than fall, so fixing for longer could be the ideal solution."

What next?

Want to see if a five-year mortgage could be the right decision? Check out our best buys to get started.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.