Should I choose a two- or five-year fixed rate mortgage?


The interest rate difference between two- and five-year fixed-rate mortgages is the lowest since 2013, new figures show.

In 2020, the average annualized rate differential was only 0.27%, according to data from comparison site Moneyfacts.

Traditionally, two-year patches were popular with buyers because their rates were much lower – but that isn’t the case now.

There is currently not a large spread between the interest rates on two- and five-year fixed mortgages.

The two-year average annual fixed rate during 2020 was 2.28%, while the five-year fixed rate was 2.55%.

Eleanor Williams, finance expert at Moneyfacts, said: “Historically, two-year fixed rate products have been popular with borrowers, but as the economy remains fraught with uncertainty, some may ultimately be better off with a five-year fixed rate mortgage. “

This is the smallest discrepancy recorded by Moneyfacts in eight years. It was down 0.09% from the 0.36% average for 2019, and well below the 0.64% gap recorded in 2016.

The gap could also narrow even further. The rate spread for today alone is 0.17 percent, the smallest daily spread since 2013.

A smaller spread usually suggests more competition in the mortgage market. This was certainly the case this year, as buyers crowded into the market when it reopened after the spring closed.

The latest data from HMRC showed residential property sales increased by more than 30% in December 2020 from 2019, as buyers rushed to meet the stamp duty clearance deadline.

Should I consider a five-year fixed contract?

Typically, five-year fixed mortgage rates are higher than two-year ones because the borrower pays for the security of knowing that their rate will not change for a longer period.

If you are offered an attractive five-year rate and the spread between this and a comparable two-year contract is small, locking it in now could save you money in the long run and also help you in the long run. prepare your budget for the future.

“For borrowers who are concerned about market fluctuations and want to be able to budget easily, a five-year fixed rate mortgage can provide much-needed peace of mind and security,” said Williams.

Data from comparison site Moneyfacts shows there was only a 0.27% difference in interest payments between five-year and two-year fixed-term mortgages in 2020

Data from comparison site Moneyfacts shows there was only a 0.27% difference in interest payments between five-year and two-year fixed-term mortgages in 2020

Once the term ends, borrowers who do not remortgage will be subject to their lender’s standard variable interest rate, which is often much higher.

Remortgaging also comes with fees.

Alex Winn, mortgage expert with online mortgage broker Habito, said: “Although you can benefit from a lower interest rate by choosing a two-year solution and you can refinance sooner if the rates go down. As interest drops further, you’ll have to pay the costs of remortgage again in 24 months – whether it’s product fees or brokerage fees (although many brokers don’t charge).

“And, if you forget to remortgage on time, you could be temporarily subject to your lender’s more expensive standard variable rate of up to 6%.

“So it’s worth keeping all of this in mind, when comparing the actual costs of transactions of different durations.”

A five-year solution could also help borrowers who are concerned about their ability to refinance in two years – for example, people who are considering becoming self-employed or fearful of being made redundant.

You don’t need to tell your mortgage provider as long as you can continue making payments.

However, there is also an argument for saying that, with so much uncertainty in the wider economy right now, making a five-year commitment might be unwise.

This is especially the case for those with a higher mortgage value, such as first-time buyers. They have seen mortgage rates on products with 10% deposits rise dramatically since before the pandemic, in some cases by more than 1%.

Therefore, they may not want to be tied to a five-year deal if interest rates start to drop.

Most mortgages are subject to a prepayment charge, which means that you will have to pay a fee if you cancel the transaction before the end of the fixed period.

This can be up to about 5 percent of the total mortgage loan balance, but it depends on what advance you take out.

Therefore, borrowers who think their living conditions or plans might change in the near future would also be wise to avoid a long term solution.

Interest rates for 10% deposit mortgages have jumped since the start of the pandemic

Interest rates for 10% deposit mortgages have jumped since the start of the pandemic

“As always, consider your own situation,” advised Jonathan Harris, managing director of mortgage broker Forensic Property Finance.

“If you know you’ll be staying in your home for the next five years, then a five-year patch will give you security at a competitive rate.

“If there is a chance that you will be moving within five years, it may be better to go with a shorter solution so that you are not caught off guard by the prepayment charge if you move within the specified period.

“In theory, you can move most mortgages into your new home, but it’s not necessarily guaranteed.”

However, others said interest rates could stay low for a long time, meaning there would be little need for a longer-term solution.

Dominic Agace, Managing Director of Realtors at Winkworth, said: “With interest rates set to stay low for a long time and life constantly changing, I personally would tend to go for the two-year fix for now. , to build flexibility into life decisions without being subject to additional early redemption fees.

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