Is a 2 or 5 year fixed rate mortgage best?

The most popular home loan in the UK is a fixed rate mortgage, according to the Financial Conduct Authority. And with turbulent interest rates over the past few years, it is understandable why.

Fixed rate mortgages are – as the name suggests – fixed for a period of time. And that means you know how much you’ll be paying every month for the fixed rate period.

With the rising cost of living and economic uncertainty, budgeting for your payment in advance makes fixed rate mortgages popular.

It does mean, of course, that when mortgage interest rates fall (as they have recently) your payments won’t fall in line with the Bank of England rate.

Anyone with a tracker mortgage sees their interest rates following the Bank of England base rate. That means when the interest goes up, so does your monthly payment. And when it falls, your payment follows suit.

But tracker mortgages will scare anyone who prefers to know what their monthly outgoings will be.

Is a 2 or 5 year fixed rate mortgage best?

Everyone’s situation is different. So before you make a decision on your home loan, it’s always better to speak to a mortgage adviser.

A mortgage broker, such as The Mortgage Dog, has access to more deals than a high street lender. That means they have a wider choice than if you visit a bank or building society. Also, brokers can access deals that you can’t find on comparison websites.

A mortgage adviser will look at your financial situation and will recommend a mortgage based on those facts. But to help you understand the difference between to the two rates, let’s take a look at the detail.

The difference between a 2 or 5 year fixed rate mortgage

You don’t need to be a mortgage expert to know the main difference between the rates. One mortgage has a fixed rate for 2 years, the other is for 5. That means you pay the same monthly repayment for whatever period of time you have it fixed for. The repayment includes payment towards the home loan as well as interest.

Once the 2 or 5 years come to an end, you move to the lender’s standard variable rate (SVR). This is usually expensive, so it becomes the time to remortgage to fix it again.

But other than time, what else is different between the fixed rate mortgages? Usually, the 2 year fixed rate deal has a lower interest payment. That makes them attractive to most buyers.

So, why would you want a 5 year fixed rate? Well, if interest rates are low and it’s clear they are likely to start rising over coming years, that’s the time to fix them for longer.

Normally, interest payments would be higher than a 2 year fixed rate, although that isn’t always the case, especially at the moment. But, overall, choosing the 5 year period could mean you pay less. This is especially the case if rates increase several times a year over the period.

A 5 year fixed rate is usually based on a number of factors, such as affordability. Two year fixed rates are stress tested at a higher rate by the lender to factor in the possibility of interest rates increasing.

You can also fix your rates for longer, such as 7 or 10 years. But they are not as popular.

So, which fixed rate should I choose?

As we’ve mentioned, it all depends on you and your individual circumstances. At the moment, 2 years may be more suitable because the rates appear to be falling. But you may prefer to know what you’ll be paying each month for the next 5 years.

A 2 year fixed rate mortgage might be worth considering if you have a big life event coming up over the period. It’s also worth considering a 2 year fixed rate if you are thinking about selling over the next couple of years, as this lowers the chance of paying a high Early Repayment Charge.

Beware that if you decide to exit your mortgage early, you are probably going to pay exit or early repayment fees. So, if you need your mortgage to be flexible, a longer term might be unsuitable for you.

What other mortgages are available?

As well as fixed rate mortgages, there are tracker mortgages. These track the Bank of England rate plus a percentage. There are also discount mortgages, and standard variable rate mortgages. We’ve looked at what each mortgage is in a previous blog.

What should I do next?

The best advice we can give is to get advice! While you may know more about mortgages after reading this or our other blogs. But it’s always better to speak to a professional when it comes to your money. You can contact our team today to arrange a free appointment.

Remember that your home may be repossessed if you do not keep up your repayments on your mortgage.