2 and 5 year fixed rate mortgage deals explained - and how to choose what to go for
by Derin Clark
Over the last few weeks, a number of mortgage providers, including Nationwide Building Society and Virgin Money, have withdrawn their high loan-to-value (LTV) deals from the market. However, despite the withdrawal of these deals, the mortgage market has remained highly competitive, particularly on deals offering fixed rates.
A fixed rate mortgage deal is often popular at times of economic uncertainty as it enables homeowners to know how much their monthly mortgage repayment will be for a set period of time. In addition to this, fixed rate deals offer competitive low rates. The lowest two year remortgage deal offers just 1.13%, while the lowest five year fixed remortgage deal currently stands at 1.35% (figures correct as at 18 June 2020).
The rate you are offered often depends on your LTV, with those at a lower LTV usually offering a cheaper rate than those with a higher LTV. You can find out exactly how much the rate will impact your mortgage repayments by using a mortgage calculator.
Traditionally, UK homeowners have tended to opt for a two year fixed rate deal but, over the last few years, five year fixed deals have become increasingly popular. One reason for this is the fall in five year rates. Now, locking into a five year deal will not cost much more than opting for a two year fixed deal.
Rate is important when considering a mortgage deal as it will impact the monthly repayments, but, as always when choosing a mortgage, the rate is not the only factor borrowers should consider.
The case for a 5 year fixed mortgage rate
A five year provides security for borrowers who are planning to stay in their home for the long-term. Homeowners with no plans to move in the foreseeable future can lock into a five year deal and know that their monthly repayments will not change for the duration of the deal. This security is particularly attractive during a turbulent economic time, when borrowers face financial uncertainty.
Locking into a five year deal could also be a good option at a time when interest rates are low, as it safeguards against potential rate rises for the five year period. Saying this, borrowers will not benefit if rates fall further. Another benefit of a five year deal is that homeowners do not have to go through the process, and cost, of looking for a new mortgage deal for a longer period of time compared with fixing into a two year deal.
The case for a 2 year fixed mortgage rate
A two year deal has the benefit of usually offering a lower rate than a five year deal, but does mean that, after the two year period has ended, borrowers will need to search for a new mortgage deal, which could be both time-consuming and costly.
Fixing into a two year deal is usually more attractive to homeowners who feel they may move home in the next few years. For example, if they think they will be starting a family in the next few years and will need to move to a larger property as a result.
A two year deal gives these homeowners the option of being able to move without costly exit fees, which they are likely to incur if they try to leave a five year deal early. Another benefit of a two year deal is that if, during the two year period competition within the mortgage market increases and rates fall, they will be able to benefit from this by remortgaging at a lower rate quicker than if they were locked into a longer-term deal.
Ideally, before making the decision as to whether to commit to a two or five year fixed rate deals, borrowers should speak to a mortgage broker who will be able to take into consideration their individual circumstances when considering which option is best.
All the current fixed mortgage deals can be found on the Moneyfacts.co.uk mortgage charts