Are you currently facing a dilemma between choosing a two-year fixed-rate mortgage or a five-year fixed-rate mortgage? If so, you have come to the right place. This is a question that many potential contractor homebuyers and homeowners looking to remortgage are currently pondering, and it’s understandable why.
The issue at hand is that a two-year fixed-rate mortgage is more expensive. Recent data from Moneyfacts reveals that the average two-year fixed rate is 5.91%, while the five-year fixed rate is 5.48%. The difference in repayment costs between the two options can amount to hundreds of pounds. However, while opting for a two-year fixed-rate mortgage means paying more, there are predictions that interest rates may decrease later this year.
This raises the question of whether choosing the cheaper five-year option would restrict you in the long run and prevent you from benefiting from even lower rates in the future.
Pros and cons of a two-year fixed rate mortgage.
As we have established, two-year fixes are currently more expensive, however, this isn’t normally the case. . In the past, people paid more for the security of a five-year shelter. Nowadays, with the expectation that interest rates will fall, the dynamics have changed.
The potential upside of two-year deals is that you have the chance to review without any penalty after the initial two years, If rates have reduced in that time, it could open up a chance to switch to a new, cheaper rate. It’s worth considering the early repayment charges (ERCs), also known as penalties, even if you opt for a two-year fixed-rate mortgage. The penalty charged tends to decrease with each passing year of the mortgage.
If you decide to exit your two-year fixed rate earlier than two years, your ERCs are likely to be lower compared to the five-year fixed rate due to the amount of time left.
Pros and cons of a five-year fixed rate mortgage.
With a five-year fix, you will currently pay less and have security your over your rate for a longer period of time. However, you will not benefit from any rate drops until after the five-year period. If rates drop significantly, you can calculate whether switching early, factoring in the ERCs, is still more beneficial. But remember, there will be a penalty charge for doing so.
How do you choose the right option for you?
Basing your decision solely on what might happen to interest rates is akin to placing a bet. Many contractors are opting for two-year fixes, taking the hit of the higher cost in the hope of taking advantage of better rates in two years. However, there is no guarantee that rates will decrease, and borrowers may regret not choosing the longer-term security of a five-year rate.
Ultimately, it’s important to consider your situation, plans, goals, and practicalities. No one can know exactly what will happen with interest rates, so it’s best to think about what is most important to you rather than try to second guess what will happen.
Consider your own future plans, such as the possibility of moving within five years or refinancing for home improvements. These factors should also be taken into account. If you’re not convinced by the two-year or five-year fixed rate options, other alternatives exist.
Lenders offer a variety of fixed deals, including intermediate three-year rates. Some lenders even offer options to fix the rate for 10 years or for the entire mortgage term. While this removes the worry of interest rate fluctuations, it may come with the drawback of potentially missing out on rate decreases. However, some lenders offer shorter lock-in periods or the chance to repay the mortgage without penalty in certain circumstances.
Are there other options?
There are also variable mortgages, such as trackers, which fluctuate based on the Bank of England base rate. While tracker mortgages are generally higher than fixed rates at the moment, they naturally fall and rise with the base rate or the lender’s variable rate.
Current predictions suggest that rates will decrease in the future, and many of these products have no ERCs, allowing for more flexibility. It’s important to carefully consider and seek advice on these types of products. If you’re remortgaging, one option is to revert to your lender’s standard variable rate (SVR) if you don’t switch to a new mortgage deal. However, the average SVR is currently 8.18%, resulting in hefty repayments. If you’re considering this option, speak to a broker as they may have less expensive solutions.
If you’re still undecided, thoroughly examine your budget and future plans. Don’t try to ‘play’ the market, but be authentic to your priorities and needs,– ultimately, no one knows what will happen to rates!
A My Contractor Broker contractor specialist mortgage broker can help you review all the options available. You can start by either calculating how much you can borrow below or contact the team on 02394 211122 for a no-obligation review.