Two-year fixed rate mortgages have usually been the most popular choice over the years. Borrowers found two-year fixes cheaper than longer deals, meaning that monthly mortgage payments were lower and there was more stability. Two-year deals also don’t lock the in borrowers with significant early repayment charges for too long. Although two-year deals may be appealing, longer deals could now be the way forward.
Presently, there is only a small difference between two and five-year fixed rates. For example, Barclays is offering a two-year fixed rate at 1.33%, while HSBC is offering a five-year fixed rate at 1.74%, both with up to 60% loan to value (LTV). This is a mere difference of 0.41%.
To make this clearer, if a borrower with a £200,000 mortgage requiring a 60% LTV loan on a 25-year-term would pay £784 per month if they chose the two-year fixed rate from Barclays. In comparison, the same borrower would pay £823 per month if they chose the five-year fixed rate with HSBC. There is only a £39 difference between the two deals.
Furthermore, there is also the issue of additional fees involved when choosing fixed-rate deals. Taking out a new mortgage after two years and again after four years would lead to an extra £1,998 payable in product fees alone over this period. There are also broker fees, valuation fees, and legal work would also create additional costs.
A long-term deal could prove to be a better option for the future. Borrowers taking a two-year fixed rate deal could risk higher rates when the deal ends. As a result, borrowers could risk paying a higher interest rate for the remainder of the five-year period for which they could have been locked in.
With the possibility of two or three interest rate rises over the next year, a five-year fixed rate could offer more security. The deal could offer peace of mind for a longer period of time, which would benefit borrowers in such an uncertain time.