If you’re buying a home for the first time or remortgaging, you might be weighing up: should you fix your mortgage for two years, or five?
It’s a valid question. Just last month, in August 2024, the Bank of England dropped its base rate by 0.25% for the first time since March 2020. This means, as of 1st September 2024, the base rate now stands at 5%.
“Speculation can be a dangerous game to play”
“Let me start off by saying: there is no right or wrong answer when it comes to deciding between a two-year fix or five-year fix,” award-winning mortgage adviser Jo Jingree at Mortgage Confidence says. “It all comes down to your personal circumstances.
“Hypothetically speaking, fixing your mortgage rate for five years could mean you might miss out on lower rates in the months to come,” the expert notes. “While fixing for two could mean you pay higher interest rates in the meantime.”
“But anything can happen. Speculation can be a dangerous game to play. So, when my clients ask me whether they should fix for two or five years, I run through the advantages and disadvantages of each and look at their current and future plans to help advise them on the right mortgages available to them.”
So, if fixed-rate mortgages are on your mind, and you’re wondering what way to turn, we’ve listed all the pros and cons of each.
But first, what exactly is a two-year fixed rate mortgage?
As its name suggests, a two-year fixed rate mortgage is when the interest rate and monthly payments remain the same for two years.
So if you fix for two years, your monthly mortgage repayments will remain the same for all 24 payments, regardless of what happens to interest rates during that time.
What is a five-year fixed rate mortgage?
A five-year fixed rate mortgage is when the interest rate and monthly payments remain the same for five years. During this time, the Bank of England base rate may fluctuate, but your repayments will remain the same for five years.
Two-year fixed rate mortgage: What are the pros of fixing for two years?
1. You have more flexibility. Planning on moving home in the next year or two? Or are you convinced that the rates will come down? Either way, a two year fix gives you more flexibility.
2. Short-term commitment. Hate the idea of committing to a mortgage for five years? Well, with a two year fix, you won’t have to sign years away. After 24 repayments, you’ll be able to switch to another deal, access another rate and reassess your current situation.
Two-year fixed rate mortgage: What are the cons of fixing for two years?
1. More potential upfront fees. Some mortgage deals come with one-off fees, such as arrangement fees and valuation fees. If you are remortgaging every two years, then these fees may rack up each time you change your lender/deal. Do note: not all mortgages come with up-front fees. However, if you plan on fixing every two years, it’s worth taking this into consideration.
2. Renewal risk. After your two year mortgage deal has come to an end, you may wish to choose another fix. However, if rates have increased in the two years, you will end up fixing at a higher rate.
Five-year fixed rate mortgage: What are the pros of fixing for five years?
1. Long-term stability. This length of fix gives you the stability of knowing how much your monthly mortgage repayments will be for the next five years. This results in a longer period of financial stability.
2. Lower interest rates. Long-term mortgages, like a five-year fixed mortgage, typically have lower interest rates. According to Uswitch, as of September 5th, the average five year fix across the big six lenders stands at 4.18% — which is 0.48% lower than the average two year fix. And, as of August 2024, some lenders are offering five-year fixes at under 4%.
3. Less hassle. Depending on your circumstances, even with the help of a mortgage adviser, you might not really want to remortgage every two years or review your finances after 24 months. If you fix for five years, you won’t have to do this for just under five years.
Five-year fixed rate mortgage: What are the cons of fixing for five years?
1. You’re locked in for five years. Hypothetically speaking, interest rates could drop in this time. This means you won’t be able to take advantage of any falling interest rates inside a five year period.
2. Lack of flexibility. If you end up moving within a couple of years and decide to switch mortgages in this time, depending on which lender you choose and the terms and conditions, you may incur an early repayment charge.
The bottom line?
There is no right or wrong answer! “At the end of the day, it’s about the individual, their personal preferences, plans, and how they feel about risk,” Jo says. “So you have to do what sits right for you, your personal circumstances and your finances.”
If you’re weighing up your options, reach out to six-time award-winning Mortgage adviser Jo, who has more than 20 years’ experience in the industry. Jo offers a 30-minute no-obligation phone call so you can explore all mortgage avenues. Get in touch here!
There may be a fee for mortgage advice. The precise amount of the fee will depend upon your circumstances but will range from £99 to £399 and this will be discussed and agreed with you at the earliest opportunity. Your home may be repossessed if you do not keep up repayments on your mortgage.
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