Question
I’m buying a house and I can’t choose between a two-year or five-year fixed mortgage.
I’m hesitant to keep my loan for five years in case mortgage rates drop, but it will save me a lot of hassle because I won’t need to change deals after two years.
But what if two-year mortgage options were cheaper? How should I compare the two options, and what should I consider besides the key interest rate?
Darren’s answer
Although this is a common question, there is no exact answer to it I’m afraid.
Many factors affect rates in the UK, and it is difficult – if not impossible – to predict what will happen locally and globally over the next two to five years. However, here are some guidelines to help you evaluate the options.
The Bank of England’s base interest rate has remained steady for some time now, which could feed into cheaper mortgage rates over time.
In some cases, the two-year and five-year rates are very close or even the same, meaning the cost difference between a two-year and five-year installation today is often small.
Fixed rate benefits for two years
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- Low starting rates: For many lenders, two-year fixed rates are a little cheaper at first
- Better position to be if interest rates fall: If lenders cut interest rates further soon, a short fix lets you refinance at a cheaper rate sooner
- Flexibility: You won’t be tied down for long, which helps if you think you might move or remortgage your property
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- Uncertainty about prices: If prices rise in a couple of years, you could end up with a more expensive deal
- If you need to remortgage sooner, you may face an early repayment charge (ERC).
Fixed rate benefits for five years
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- Budget stability: Your monthly payments are guaranteed for a longer period, which is excellent if you are planning joint financing, children, changes at work or simply want peace of mind
- You won’t need to deal with a remortgage in two years, saving time, hassle and potentially legal/valuation costs
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- Slightly higher initial rate: In many current examples, five-year fixes have a small premium over two-year deals
- Benefit less from lower interest rates: If there is a reduction in interest rates soon, you will not benefit until the five years are up, unless you pay remortgage penalties early
In terms of what makes sense for you, it is important to review the above very carefully and think about your priorities. For example, are you planning to move? Do you want longer stability for your mortgage payments?
Keep in mind that many mortgages are transferable, which may help avoid an ERC.
For any of the above options, it is necessary to seek advice as the picture is complex.
Talk to a broker who can review your entire situation to make a recommendation and compare costs, based on your circumstances.
