Since the Bank of England indicated that rates may increase, we have received a number of enquiries from people asking whether it’s best to fix a mortgage for 2 years or 5+ years.
While the longer term stability that a 5 year fixed rate mortgage may sound appealing, it’s important to weigh up the pros and cons.
Firstly, 5 year fixed rate mortgages tend to be more expensive than 2 year fixed rate mortgages. Every person’s situation is different, so it’s important to look at the total cost over the initial fixed rate period and include associated fees and costs. Savings could be made by taking a low 2 year fixed rate mortgage, however when you take into account potential fees that need to paid again in 2 years’ time to get a good idea of whether this approach is cost effective.
Secondly, 5 year fixed rate mortgages are less flexible than 2 year fixed mortgages. In exchange for securing your payments, a lender will want to secure their return. This will be achieved either from the interest you pay during the fixed rate or by charging early repayment charges if you repay your mortgage early. Although 2 year fixed mortgage can have repayment charges, they are likely to be less than those repayment changes on a five year fixed mortgage. Mortgage early repayment charges are nothing to be scared of, but careful financial planning is required in order to ensure they are avoided. In an ideal world, your plans will involve staying in the same property for the duration of the fixed rate – this will be neat and tidy. However, if you think there’s an outside chance of moving home during the fixed rate period, you need to me sure that a) the mortgage is portable and b) the lender is likely to provide you with the additional funds required if you are scaling up (if you plan to scale down and borrow less, the lender will more than likely charge you an early repayment charge on the difference).
If after considering the above you feel that a 5 year fixed rate mortgage is the best way forward, it may be worth considering a 10 year fixed rate mortgage. Although this approach follows on from the above i.e. 10 year fixed rate mortgages being higher rates than 5 year fixed mortgages and less flexible, they also have their place and historically speaking rates are at an all time low.
Whatever your initial thoughts are, it’s probably a good idea to get specialist mortgage advice before proceeding. In addition to finding the best mortgage deal, whether it’s 2 year, 5 year or 10 years fixed, careful financial planning is required to make sure that the risks of making expensive mistakes is limited.