How to choose between a two or five year fix.
Homeowners and first-time buyers are in a difficult situation with their mortgages as a result of the rising interest rates.
After the Bank of England again raised interest rates, millions of people with variable-rate mortgages will have to make larger repayments.
Rates were raised by the central bank from 4.5% to 5% in June, the highest level since September 2008 and less than 15 years ago.
Additionally, earlier this week, for the first time this year, the average interest rate on a five-year fixed-rate mortgage dipped past 6%.
Because interest rates don’t fluctuate over the length of a fixed contract, borrowers with fixed-rate mortgages have so far been protected from the immediate effects of rate increases.
However, when it comes time for these homeowners to remortgage, they will be surprised by larger repayments since they will be compelled to take out fixed arrangements with significantly higher rates.
According to MoneyFacts, the average two-year and five-year fixes are both currently above 6%.
Additionally, some mortgage brokers worry that rates may potentially reach 7% by the end of the summer.
To further understand how long you should fix for, we chatted with Nicholas Mendes from mortgage advisors John Charcoal.
Which fixed mortgage term is the most suitable for me at this time?
According to Nicholas, how long you fix for fully relies on your financial situation and expectations.
Two-year fixed rates are fairly common and readily available, he noted.
“For folks who don’t have urgent intentions to relocate back home, they provide stability.
“However, if you planned to stay in your home for the medium to long term, but are open to, or expect your circumstances to alter later on, you might choose a five-year fix.
It offers steadiness without requiring you to plan ahead too much.
It’s always preferable, according to Nicholas, to speak with a mortgage broker who can evaluate your situation and make sure you get the greatest price for your needs.
Why should I think about a mortgage with a five-year fixed rate?
There are, of course, advantages and disadvantages to both mortgage lengths, according to Nicholas.
People who wish to make plans for the future may prefer a longer-term solution, which could also end up saving them money over time.
If you decide on a shorter time, like every two years, there will be numerous charges to take into account throughout, say, a ten-year period.
“A longer-term fixed would reduce the amount of time you review and, as a result, reduce the costs incurred.”
These expenses include things like broker fees, valuation fees, and mortgage arranging fees.
For someone who wants to finish their existing mortgage without worrying about the ups and downs of interest rates, a longer mortgage term might also be a good option.
A longer-term fixed rate assures your monthly payment, providing you with security during difficult times, according to Nicholas.
A five-year fix can also shield you from unforeseen events like job changes.
“Lenders assess affordability against criteria at the point of application,” Nicholas said.
“Entering into a longer-term deal could give you the stability to fit within these plans if you’re looking to change careers or go self-employed.”
Why should I think about a mortgage with a two-year fixed rate?
A shorter-term mortgage, such a two-year fix, has advantages as well.
The cost of a longer-term mortgage could rise over the duration of a fixed-rate period, according to Nicholas.
This is due to the possibility of lower mortgage rates in the future due to changes in the base rate.
“Interest rates could continue to rise or decline, as we have seen over the past ten years,” Nicholas remarked.
“Under these conditions, a household choosing a two-year fixed would benefit than those bound to a longer deal by being able to periodically review their options.”
There will also typically be early repayment penalties (ERCs) with fixed rates.
If you want to stop your mortgage arrangement before the formal deal term expires, you may have to pay this cost to your lender.
“Most fixed rates will have this clause, and this is important to make note of,” Nicholas said.
For instance, if you leave after the first year of a five-year fixed rate agreement, you will be charged 5%, 4%, 3%, and so forth.
Therefore, leaving a five-year fixed plan can cost you more than leaving a two-year fixed deal.
The price will vary according to how much you’ve borrowed and how far along your deal is.
How to get the greatest mortgage offer
Obtaining the best rates for a traditional mortgage entirely depends on what is offered at any particular time.
However, there are a number of ways to find the greatest offer.
Typically, you can get a cheaper rate the bigger your deposit is.
You might be able to get better rates if you’re remortgaging and your loan-to-value ratio has changed.
You could be able to obtain better rates if your credit score improves or your pay increases.
If you have a fixed rate, you can notice higher rates after the current period expires following 13 increases in the bank rate since December 2021.
Additionally, it makes sense to get in touch with your broker now to lock in a rate if you have a fixed agreement that is about to expire in the next six months.
You can always apply for a different rate before you remortgage if they decline between now and the conclusion of your contract.
Lenders that account for almost 85% of the mortgage industry have also agreed on a new mortgage charter.
According to the charter, lenders must permit current customers to change to interest-only payments for a period of six months or prolong the duration of their mortgage to lower their monthly payments.
They can do this without performing a fresh affordability analysis, and it won’t have an impact on credit ratings.
As Nicholas indicated, there will typically be an early exit fee if you leave a fixed contract early, therefore you want to avoid paying it.
It might be worthwhile to pay to leave the deal, but examine the expenses first. It depends on the cost and how much you could save by switching versus sticking.
Use a mortgage comparison tool to check what’s available to locate the best price.
You can also consult a mortgage broker, many of whom provide free assistance to help you get the best price.
Ask your broker first because some brokers charge for guidance.
Although it might cost a few hundred pounds, you could end up saving thousands of pounds altogether on your mortgage.
Although some mortgages have no costs at all, you will also need to account for them. You can either include the fees to the mortgage’s cost, but be aware that doing so will result in interest payments and a higher overall cost.
To find out how much you could borrow, utilise a mortgage calculator.
Keep in mind that you will need to meet the tight eligibility requirements of the new lender if you decide to remortgage. These requirements will likely involve affordability checks and an examination of your credit file.
You might also be required to present paperwork like power bills, benefit evidence, your passport, your past three months’ worth of paystubs, and bank statements.
Remortgaging to a new arrangement with your current lender is an option if you don’t want to borrow more or prolong your term in order to avoid fresh affordability tests.