Fixed rate mortgage has its advantages and disadvantages, but how long do you fix in for?
Here are the pros and cons of both 2 and 5 year fixed rate mortgages.
Lower interest rates: these deals typically have lower interest rates than longer fixed term deals. Having said that, recently the gap between interest rates for 2 and 5 year fixed mortgages has really narrowed, making 5 year deals look more attractive.
Short term commitment: these mortgages are a good choice if you think you might move home after a couple of years or if your circumstances might change in another way. You’re not locked into a long-term commitment.
Opportunity to remortgage sooner: you might have the chance to remortgage and get a better mortgage deal after 2 years if banks and other lenders are lowering their interest rates.
Interest only fixed for a short time: you’ve only got 2 years of fixed interest before your deal ends, at which point you’ll be transferred to your lender’s (often much higher) standard variable interest rate.
Extra fees to remortgage: if you decide to remortgage your home to get a better deal once your fixed rate period ends, this is likely to involve additional costs.
New mortgage may not be so attractive: during your fixed term period, banks and other lenders might have raised their interest rates, making it harder for you to get a deal that’s as good as your previous one.
Long term stability: with a 5 year fixed rate deal, you’ll have a longer period of financial stability. This is especially useful in times of economic uncertainty, when interest rates are fluctuating a lot. Longer term fixed rate deals are also available.
Good choice for a forever home: a longer term deal can work well if you’re confident that you’ll be staying in your home for the next few years.
Beat rising interest rates: going for a long term fixed rate deal can be a shrewd decision if interest rates are predicted to start rising soon.
Avoid the hassle of remortgaging: unlike with a 2 year fixed mortgage, you won’t face the fees or the paperwork of remortgaging after only a relatively short time.
Higher interest rates: you may be paying a higher interest rate than you would with a 2 year fixed rate deal. But the gap between interest rates for 2 and 5 year fixed mortgages has narrowed over the last few years.
Long term commitment: it’s a less flexible option if your circumstances change and you need to move home. You might be able to transfer the mortgage to your new property, but if you can’t, you may face early repayment charges for moving.
Unable to take advantage of falling interest rates: If banks and other lenders lower their interest rates during your fixed rate period, you won’t be able to take advantage of that for a while. You’re committed to paying a specific rate of interest until the end of the 5 years.
When comparing mortgage deals (fixed or variable rate), look beyond the interest rate. Some mortgage lenders will charge a lower interest rate but then balance this out with a high mortgage arrangement fee (£1,000 to £2,000 or more). Make sure your calculations take this into account.
So, to sum up. If you want to take advantage of lower interest rates and you’re happy to remortgage again relatively quickly, a 2 year fixed mortgage deal might be a good choice for you. But, if you’re looking for long term stability and you’re willing to pay a bit more interest to secure that, you could consider a 5 year fixed mortgage – or even one with a longer fixed period.
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