Our monthly income isn’t getting us as far as it used to. The weekly food shop is eye watering and
our energy bills are still through the roof. Now it’s coming for our monthly mortgage payments too.
It’s the big question within the mortgage industry at the moment. What’s going to happen with
interest rates? Are fixed rates going to go up, go down or stay the same? Should I choose a fixed rate mortgage and if so, should I fix for 2 years or 5 years?
With both options offering unique advantages and considerations, it’s essential to weigh up each option carefully to make an informed decision. In this blog post, we’ll delve into the pros and cons of each option to help you navigate this pivotal choice.
What is a Fixed Rate Mortgage?
Before diving into the comparison, let’s recap on what exactly a fixed-rate mortgage is. In a fixed-rate mortgage, the interest rate remains constant for the duration of the term, providing stability and predictability of your monthly repayments for the fixed rate period. This contrasts with variable mortgage rates, where the interest rate fluctuates periodically, often based on bank rates set either by the lender or the Bank of England.
2 Year Fixed Rate: Flexibility and Short-Term Benefits
A 2 year fixed rate mortgage offers short-term predictability and a little more flexibility.
Pros:
- Flexibility: With a shorter term, borrowers have the freedom to reassess their financial situation and market conditions sooner. This flexibility can be advantageous if you anticipate changes in your circumstances or improvements in interest rates.
- Potential Savings: If you plan to sell your property or refinance within the next few years, a 2 year fixed rate can allow you more flexibility by not committing to a longer-term obligation.
Cons:
- Renewal Risk: At the end of the term, borrowers face the prospect of renegotiating their mortgage terms, potentially exposing them to higher rates if market conditions have changed unfavourably.
- Less Stability: Shorter terms may lead to frequent refinancing, exposing borrowers to transaction costs and the hassle of reapplying for a mortgage.
5-Year Fixed Rate: Long-Term Security and Peace of Mind
A 5-year fixed rate mortgage offers stability and long-term predictability, which can be appealing to borrowers seeking security amid economic uncertainty.
Pros:
- Lower Rates: In normal times, a 2 year fixed rate would give you a lower interest rate. However, at the time of writing, a 5 year fixed rate is actually cheaper than a 2 year fixed rate as interest rates are expected to fall over the next few years.
- Rate Security: Locking in a fixed rate for five years shields borrowers from interest rate fluctuations, providing peace of mind and predictability in budgeting.
- Long-Term Planning: With a 5-year term, borrowers can plan ahead with confidence, knowing their mortgage payments will remain unchanged for an extended period.
Cons:
- Limited Flexibility: Longer terms limit borrowers’ ability to take advantage of lower rates or refinance without incurring prepayment penalties.
- Higher Exit Fees: a 5 year fixed rate will typically have much higher early repayment charges (ERCs) in the first few years than a comparable 2 year fixed rate.
So what Now?
Good question. There are lots of experts making predictions about what is going to happen to
mortgage rates. None of them are predicting that rates are going to come back down to 2% any time
soon. We might never see these ultra low rates again in our lifetime. The fact is that we need to get
used to higher mortgage rates.
Unless you’re a very confident economist, I would advise against trying to play the market. Even the
Governor of the Bank of England often gets his predictions wrong! So there’s not much hope for the
rest of us.
Ultimately, the choice between a 2 year and 5 year fixed rate mortgage boils down to your individual financial goals, risk tolerance and your view on the outlook for future interest rates. Consider factors such as your future plans, market conditions, what is affordable to you and the importance of stability versus flexibility in your decision-making process.
Just because your mate Dave is convinced rates are coming down and so he’s gone for a 2 year fixed, doesn’t mean this is right for you. He’s probably also the one who convinced you that crypto was going to make you a millionaire and we all know how that panned out. Your choice of mortgage is a very personal decision and best discussed with a broker who can advise you clearly of your options and discuss your unique circumstances.
Remember that here at Mortgage Links, we provide free and independent mortgage advice. Book in
with us here to see how we can help.
