Two-year or Five-year Fixed Mortgages – Which One Should You Choose?by Molly Harris Molly Harris is a Mortgage Loan Officer
When it comes to taking out a mortgage, you must know about fixed-term mortgages and standard variable mortgages. The essential difference between these types of mortgages is the former involves fixed monthly repayments regardless of the change in the base rate of the Bank of England. At the same time, the latter requires monthly repayments based on the base rate. As it changes, the monthly repayments also change, hence standard variable interest rate.
Fixed-rate mortgages are generally advertised as two-year or five-year fixed mortgages. It means you will pay down your mortgage at the fixed interest rate for two years (if a two-year mortgage) and five years (if a five-year mortgage) and once this fixed interest period expires, you will be put on a standard variable interest rate.
Now the question is which deal you should choose at the time of taking out a mortgage.
The demand for five-year fixed mortgages is soaring
If you talk about the average cost, it has dropped on both types of deals. Whether you are looking to buying a house or refinancing your current mortgage, rates are attractive.
The overall picture says five-year fixed mortgage deals have gained popularity recently and the following reasons account for it.
- Banks including mortgage lenders have been struggling to make profits on low-cost two-year mortgage deals.
- Homebuyers are looking for greater security. The higher the fixed monthly repayments, the higher the financial security.
It is a stupidity to imagine five-year deals are the same price as two-year deals, but they are not outrageously high. If you compare the gap between both types of deals, the gap in interest rates continued to shrink with each passing day. The price gap was 0.71% in 2016, that plummeted to 0.31% in 2019.
Whether the loan-to-value is 60% or 95%, initial rates are slightly higher for five-year fixed mortgage rate than the two-year deal, and the fees remain the same for both deals as long as the loan-to-value is 75% and 90%.
Five-year fixed rate deal is not suitable for everyone
There is no doubt that you should take out a mortgage with a five-year fixed rate deal, but it does not mean that every borrower can afford it. Fixed interest rate deals grant you more security as you know beforehand how much amount you are to pay at the end of the month and therefore you can make a budget to avoid falling behind repayments, but they are a bit expensive. You need to consider the following charges that it involves.
- Early repayment charges
If you decide to move home, you will have to apply for a remortgage. It means you will have to pay the whole of the current mortgage. Since you will be paying before the term expires, you will have to pay early repayment charge. These charges can be hefty that it can wipe out all of your savings.
Make sure that you ask your lender for these charges at the time of applying for a mortgage. Charges vary from lender to lender. Therefore, shop around before rushing in. Experts suggest that you should contact a mortgage broker such as Shinemortgages.co.uk as they can help you choose a lender that charges lower early repayment fees. It becomes essential if you are looking to apply for a mortgage with bad credit.
- Upfront fees
Whether a lender discloses it or not, you cannot escape upfront fees. Upfront fees for five-year fixed rate deals are generally higher than two-year fixed rate deals. Average fees for such deals are mainly higher at both 60% and 75% loan-to-value. If loan-to-value is 90%, you will be paying less than two-year fixed rate deals.
Here is how you can get the best deal
- If you can put down 10% of the value of your property as a deposit, go ahead as you will get cheaper deal.
- Find out how long you are going to stay in your house. Your future plans will have a significant impact on your mortgage.
- Get an idea of processing fees lenders charge. Since it varies from lender to lender, you should shop around carefully.
- You should also contact a mortgage advisor. They will give you suggestions based on your financial circumstances.
Well, whether you like to get a two-year or five-year fixed interest rate deal, you will have to consider all factors from repaying capacity to upfront fees and early repayment charge. If you cannot decide, you should take the help of a mortgage broker. They will recommend you to a lender whose deals will suit your budget. Whether you choose a two-year deal or five-year deal, make sure that you will not commit a default. The most crucial thing is to be on top of your repayments. It is what a mortgage lender will expect from you.
Created on Mar 30th 2020 07:53. Viewed 76 times.