I’m a mortgage expert – how to choose between a two or five year fix

HOMEOWNERS and first-time buyers are facing mortgage misery as interest rates soar, leaving them with a big dilemma.

Millions on variable-rate mortgages face higher repayments after the Bank of England hiked interest rates again.

The central bank increased rates from 4.5% in May to 5% in June, the highest in just under 15 years since September 2008.

And earlier this week, the average interest rate on a five-year fixed rate mortgage ticked above 6% for the first time this year.

Borrowers on fixed-rate mortgages have been cushioned from the immediate impact of interest rate rises so far – because rates don’t change within a fixed deal’s term.

But when these homeowners come to remortgage, they will face a shock with higher repayments as they’ll be forced to take out fixed deals with much higher rates.

Both the average two-year and five-year fixes are now above 6%, according to MoneyFacts.

Plus, some mortgage brokers fear rates could even hit 7% before the summer is over.

We spoke to Nicholas Mendes, from mortgage advisors John Charcoal to help understand how long you should fix for.

Which fixed mortgage term is best for me right now?

Nicholas said that how long you fix for depends entirely on your financial circumstances and expectations.

He said: “Two-year fixed rates are very popular, and there are many on the market.

“They offer stability for people with no immediate plans to move home.

“But you may want a five-year fix if you intended on staying in your property for the medium to long term, but are open to, or expect your situation to change later on.

“It provides stability without asking you to think too far in advance.”

Nicholas said it’s always best to speak with a mortgage broker who can assess your circumstances to make sure you get the best deal that fits your needs.

Why should I consider a five-year fixed rate mortgage?

Nicholas says that there are, of course, pros and cons to both mortgage terms.

A longer-term fix could be better for people who want to make plans for further ahead, and could save you money in the long run.

He added: “If you fixed on a shorter period, like every two years, there will be multiple costs to consider within a ten-year period, for example.

“A longer term fixed would reduce the amount of time you review as a result reduce the costs incurred.”

These costs include things like a mortgage arrangement fee, valuation and broker fees.

A longer mortgage term could also be useful solution for someone that wants to see out their current mortgage without any worries about the ups and downs of interest rates. 

Nicholas said: “Choosing a longer-term fix rate guarantees your monthly payment, giving you peace of mind in times of uncertainty.”

A five-year fix could also protect you from changes in circumstances, such as switching jobs.

Nicholas explained: “Lenders assess affordability against criteria at the point of application.

“If you are looking to change profession, or switching to being self-employed, tying into a longer-term deal could give you the stability to fit within these plans.”

Why should I consider a two-year fixed-rate mortgage?

There are also benefits to taking out a shorter-term mortgage, such as a two-year fix.

Nicholas said taking out a longer-term mortgage could end up being more expensive over the course of a fixed-rate period.

This is because future changes in the base rate could cause mortgage rates to drop.

Nicholas said: “Interest rates could continue to increase or fall, as we have seen in the last ten years.

“In these circumstances a household who chose a two-year fixed would have benefit than those tied into a longer deal to be able to regularly review their options.”

Most fixed rates will also have an early repayment charges (ERCs).

This is a fee you might have to pay your lender if you want to end your mortgage deal before the official deal term ends.

“Most fixed rates will have this clause, and this is important to make a note of,” Nicholas said.

On a five-year fixed rate deal, for example, you’ll be charged 5% if you leave in your first year, 4% in your second, 3% in the third year, and so on.

So if you decide to leave a five-year fixed deal, you could end up paying more than leaving a two-year fixed deal.

The cost will depend on how much you’ve borrowed and how far you are into your deal.

How to get the best deal on your mortgage

If you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.

But there are several ways to land the best deal.

Usually the larger the deposit you have the lower the rate you can get.

If you’re remortgaging and your loan-to-value ratio has changed, this could also give you access to better rates than before.

A change to your credit score or a better salary could also help you access better rates.

If you have a fixed rate, you could see higher rates when you come to the end of the current term after 13 Bank rate rises since December 2021.

And if you’re nearing the end of a fixed deal in the next six months it’s worth contacting your broker now to lock in a rate.

If they come down between now and the end of your deal, you can always apply for another rate before you remortgage.

A new mortgage charter has also been agreed by lenders representing around 85% of the mortgage market.

Under the charter, lenders will allow customers who are up to date with their payments to switch to interest-only payments for six months, or extend their mortgage term to reduce their monthly payments.

They can do this without having to do a new affordability assessment and it won’t affect credit scores.

Leaving a fixed deal early will usually come with an early exit fee, as Nicholas mentioned, so you want to avoid this extra cost.

But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.

To find the best deal use a mortgage comparison tool to see what’s available.

You can also go to a mortgage broker who can compare for you, with many offering free advice to secure you the best deal for you.

Some brokers charge for advice, so ask them first.

It could cost a couple of hundred pounds but it might save you thousands on your mortgage overall.

You’ll also need to factor in fees for the mortgage, though some have no fees at all, or you can add it to the cost of the mortgage, but beware that means you’ll pay interest on it and so will cost more in the long term.

You can use a mortgage calculator to see how much you could borrow.

Remember, if you decide to remortgage to a new lender you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks, and looking at your credit file.

You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.

It’s possible to avoid new affordability checks by remortgaging to a new deal with your existing lender, providing you don’t want to borrow more or extend your term.

Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.

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