The short answer is that it depends very much on your individual circumstances, and whether these are likely to change over the short term, as well as how long you want peace of mind that your payments won’t change. Here, we weigh up some of the pros and cons of two and five-year fixed rates to help you decide which might be right for you.
If you can’t make up your mind, it’s worth seeking professional advice from a broker who can explain which deals you’re likely to be eligible for, and which is likely to be best for you based on your requirements.
Pros and cons of short-term fixed ratesMany people choose short term two-year fixed rate mortgages because they provide them with greater flexibility than if they were locked in to a five-year deal. For example, if interest rates fall over the next couple of years, you’ll be free to remortgage to a lower rate as soon as your deal finishes. However, there are no guarantees this will happen and as the events of last year showed us, no-one can accurately predict what might happen to rates in the future.
One of the downsides of locking into a two-year fixed rate mortgage is that rates are currently higher for short-term deals than they are for longer-term fixes, so your mortgage payments during the two year period could cost you more than if you signed up for a five-year fix.
You’ll also have to review your mortgage again in a couple of years and potentially pay more arrangement fees and switching costs when you come to remortgage.
Pros and cons of long-term fixed ratesOne of the biggest benefits of going for a longer-term fixed rate mortgage is that five-year fixed rates are currently lower than two-year fixed deals, so your monthly payments would cost less. This is because markets are anticipating that once inflation is brought under control, interest rates may start to fall again.
Another advantage of locking in for the long term is that you’ll have peace of mind that your payments will remain the same for a longer period. This budgeting certainty can be hugely valuable if you’re under financial pressure and would struggle to cope with fluctuating payments.
However, there are other factors to consider. For example, although most fixed rate deals are portable, so you can take them when you move, it’s not just as simple as switching your mortgage over to a new property. You will still need to meet the lender’s requirements when you take it across to your new home, and if your circumstances have changed since you took out the mortgage, you may no longer meet your lender’s affordability criteria. It’s also worth noting that if the property you want to buy costs more than your old home, any additional borrowing you might need is likely to be at a different rate and your lender may not offer the best deals at the time.
Another potential drawback is that as you’ll be locked into your rate for longer, if interest rates fall substantially, you could find that you’re stuck paying a higher rate, as most fixed mortgage deals have hefty early repayment charges during the fixed rate period.