Remortgaging? If you’ve decided you want to fix, the next big question is how long for. Here's the latest mortgage analysis to help you decide.
If you're coming to the end of your mortgage deal and looking for a new fixed rate, your main options will be to fix in for either two or five years.
Traditionally, five-year fixed rates have come with higher interest rates than those charged on two-year deals, as homeowners pay for the longer-term security.
But the difference between rates for the two mortgage types now stands at just 0.36%, according to new research from Moneyfacts, which is the lowest differential in seven years.
The average interest charged on two-year fixed rate loan is now 2.49%, compared with 2.85% for a five year one.
Darren Cook, finance expert at Moneyfacts.co.uk, said: “It seems that the intense competition between lenders within the two-year fixed rate sector is also appearing in the five-year fixed rate market, with the average five-year fixed rate falling by 0.06% more than its two-year counterpart since January this year.”
What are the pros and cons of each deal length?
The main advantage of a five-year fixed rate mortgage over a two-year fixed rate deal is that homeowners have the security of knowing exactly what their monthly mortgage payments will be for the next five years, regardless of what happens with the Bank of England base rate.
At the same time, they do not face the hassle or cost of having to remortgage after just two years.
With mortgage arrangement fees on a best-buy two-year fixed rate loan currently standing at £1,995, homeowners could save themselves a considerable sum by fixing for a longer period.
What else should borrowers consider?
While the gap between a two-year and a five-year fixed rate mortgage may have narrowed, five-year deals are still more expensive.
A homeowner with a £200,000 mortgage would pay more than £450 more per year if they opted for an average priced five-year deal compared to a two-year one.
The other downside of five-year deals is that homeowners are locked into them for longer.
While this may sound like good news if interest rates are rising, it can become expensive if your circumstances change and you need to sell your home.
While many fixed rate mortgages are portable, meaning they can be moved to a different property if you sell your home and buy a new one, if you want to exit the mortgage altogether, you can expect to pay a hefty penalty.
So-called early redemption fees vary between lenders, so make sure you know what you are signing up to when you take out your loan.
As a general rule, lenders typically charge the equivalent of the number of years left on the loan as a percentage of the mortgage that is outstanding.
For example, if you have three years remaining on your fixed-rate term and £150,000 in outstanding mortgage debt you will be charged 3% of this sum or £4,500.
What about 10-year deals?
The average interest rate charged on a 10-year fixed rate mortgage has also fallen since the beginning of the year to stand at 3% now.
Although the difference between rates on a five-year and 10-year loan has widened slightly during that period, borrowers still only pay 0.15% more to fix their interest rate for a decade.
As with five-year deals, opting for a 10-year loan not only gives greater certainty but also potentially saves a significant sum on arrangement fees.
But with early redemption penalties as high as 7% of the outstanding mortgage sum if you need to exit in the first two or three years, borrowers need to be confident they will see through the term.
Some 10-year fixed rate mortgages have lower early redemption penalties, so it is worth bearing this in mind and shopping around if you opt for one of these deals.
Top 3 takeaways
- The gap between the cost of a two-year fixed rate mortgage and a five-year one has fallen to a seven-year low
- The rate differential between the two mortgages is now just 0.36%
- The average interest charged on a two-year fixed rate mortgage is 2.49%, compared with 2.85% for five-year deals