Should I get a 2 year fixed or 5 year fixed rate?
If you have made up your mind that a fixed rate mortgage is more suitable for you than a variable product, the next decision would be to determine the length of time for which you want to fix it. While lenders provide fixed rates from 2-10 years, the majority of them offer 2 and 5-year fixed rates. It is possible that neither of these options may be ideal for you. In this guide, we will discuss the advantages and disadvantages of each.
Why do most lenders only offer 2 and 5 year fixed rates?
Most mortgage lenders only offer 2 and 5 year fixed rate mortgages because they are linked to the swap rates. Swap rates are the rates at which lenders borrow from each other on the money markets, and they are used to determine the cost of fixed-rate mortgages.
Lenders have to balance the risk of offering long-term fixed-rate mortgages against the risk of borrowing at a higher rate than they can lend at. As a result, they tend to offer 2 and 5 year fixed-rate mortgages as they are a balance between offering a competitive product and mitigating the risk of borrowing at a higher rate than they can lend at.
2 or 5 year fixed mortgage in 2023
When deciding between a 2-year fixed rate mortgage and a 5-year fixed rate mortgage, it’s important to consider recent trends in interest rates. Towards the end of 2022, interest rates rose sharply, but thankfully have started to decrease slightly in the first quarter of 2023.
While fixing in for a longer term may mean committing to a higher rate for a prolonged period of time, it’s important to also recognise that unexpected events can quickly change the market. Assuming that rates will continue to decrease could be unwise given the potential for sudden changes in the economy.
Is a 2 year or 5-year fixed mortgage better: A quick guide to choosing the best rate type for you
A fixed rate mortgage is a type of mortgage where the interest rate remains fixed and does not change during a set period, typically between two to ten years. This means that the borrower’s monthly payments remain the same, making it easier to budget and plan ahead.
Fixed rate mortgages are popular among home buyers as they offer protection against potential interest rate increases in the future. However, they may also come with higher initial interest rates compared to variable rate mortgages.
A variable rate mortgage is a type of home loan where the interest rate charged by the lender can change over time, usually in response to changes in the market interest rates. With a variable rate mortgage, the borrower’s monthly payments can fluctuate as the interest rate changes, making it difficult to budget for long-term. These types of mortgages can be appealing to borrowers who believe that interest rates will remain low or who want to take advantage of lower initial interest rates.
A quick guide to choosing a 2 year or 5 year fixed rate
2 Year fixed rate Pros
- The opportunity to remortgage earlier
- Less commitments and tie in period
- Lower early repayment charges
- Potentially lower interest rates
5 year fixed rate pros
- Longer term protection from possible interest rate rises
- Enables to you budget and certainty for a longer period
- Potential to save and build more equity before you remortgage.
Should I fix my mortgage for 2 or 5 years?
Advantages of 2 Year Fixed Rate
You may benefit from lower fixed rate deals
Usually, choosing a shorter fixed-rate mortgage results in lower interest rates, which means you can save money in the short term. However, as of April 2023, interest rates on longer-term fixed rates are currently higher than those on shorter-term mortgages.
You’re not locked into a long-term commitment
Two year fixed rate mortgages have tie-in periods that are typically shorter than those of longer-term mortgages. If you need to repay the mortgage early, the charges are usually lower compared to five year fixed rate mortgages. Choosing a 2 fixed rate mortgage can provide you with more flexibility, for instance, if you plan to sell the property soon and don’t want to be tied down for a long period.
Disadvantages of 2 year fixed rate mortgages
Your interest is fixed for a short length of time
Opting for a 2 fixed rate mortgage provides less certainty and leaves you vulnerable to interest rate fluctuations when the fixed-rate period ends and the mortgage rate is up for review. This isn’t a bad thing if interest rates come down but will result in higher monthly mortgage payments if they increase.
You will have to pay new mortgage fees
Mortgages frequently include arrangement fees or extra costs when remortgaging. Opting for shorter-term fixed-rate mortgages can result in higher accumulation of fees and costs, which can sometimes negate any potential savings and even outweigh them.
As an example, suppose you arrange a two-year fixed-rate mortgage each time and pay a £1,000 arrangement fee. Over a five-year period, you would incur £3,000 in fees with the two-year fixed-rate mortgage compared to £1,000 with the five-year fixed-rate mortgage.
You may have less financial certainty
Shorter-term fixed-rate mortgages provide less certainty compared to longer-term fixed-rate mortgages. This is because the shorter fixed-rate period is subject to interest rate fluctuations, which can cause changes to your monthly mortgage payments.
Advantages of a 5-year fixed rate mortgage
You can beat rising interest rates
One advantage of a five-year fixed-rate mortgage is that if you secure the mortgage during a low-interest rate period and the rates increase, you may end up paying less overall than if you had selected a shorter-term fixed-rate mortgage and had to switch to a higher rate sooner. With a longer-term fixed-rate mortgage, you have a longer period of rate security, which can result in greater savings over time.
You can have more financial certainty
Selecting a longer-term fixed-rate mortgage offers greater certainty and enables you to plan ahead, knowing precisely what your monthly payments will be for the duration of the fixed-rate period.
More time to save for a new mortgage
Opting for a five-year fixed-rate mortgage gives you a significant amount of time to save or build up equity, which can potentially allow you to qualify for a better loan-to-value (LTV) product when you remortgage. For instance, you might start with a 90% LTV and remortgage after five years at 75% LTV, potentially qualifying for lower interest rates due to the improved LTV ratio.
Disadvantages of a 5-year fixed rate mortgage
You may incur a higher interest rate
When interest rates are low, longer-term fixed-rate mortgages typically come with higher interest rates compared to shorter-term fixed-rate mortgages. This is because lenders factor in the possibility of interest rates rising in the future, and the longer the fixed-rate period, the greater the potential risk for them.
You have a longer-term commitment
Choosing a five-year fixed-rate mortgage means committing to that mortgage for the entire fixed-rate period and only being able to exit the deal by paying substantial exit penalties. If you plan to pay off significant chunks of the mortgage within a short period, such mortgages may not be suitable. Similarly, if you need to sell the property without porting your mortgage, the penalties associated with breaking a fixed-rate mortgage deal could be high.
You won’t be able to take advantage of falling interest rates
If interest rates fall when you are midway through a fixed-rate mortgage term, you will not be able to take advantage of the lower rates until your fixed-rate period ends or be required to pay an early repayment charge (ERC) to exit the fixed-rate mortgage deal early.
Joint 5 year fixed rate mortgages
Buying with a friend
If you are buying a property with a friend, it is quite possible that at some point, one or both of you will want to move on and pursue individual paths. If you are tied into a long-term five-year fixed-rate mortgage and decide to sell the property to pursue other things, you may be required to pay an early repayment charge (ERC), which can be as high as 5% of the outstanding balance. It is essential to consider such factors carefully and seek professional advice before committing to a long-term fixed-rate mortgage when buying property jointly with someone else.
Buying with a partner
If you are purchasing a property with a partner, committing to a 5 year fixed rate mortgage can be a significant decision. While it is not pleasant to think about, if circumstances change, and you need to sell the property before the end of the fixed-rate period, you may face substantial exit fees. Choosing a shorter-term, 2 year fixed rate mortgage may provide more flexibility, with a break clause to review the mortgage terms and consider any necessary changes.
2 year or 5 year fixed rate mortgage with bad credit
If you have bad credit when taking out a mortgage, you may have to settle for a higher interest rate, such as with an adverse credit lender. Choosing a 5 year fixed rate means you will be locked into a deal based on your current adverse credit and potentially paying a high rate for the entire term. Opting for a shorter-term fixed rate allows you to review your mortgage once it ends, and if your credit improves, you may be able to remortgage with another non-adverse lender offering lower rates. However, there is no guarantee that your credit will improve or rates will remain stable.
Planning on moving
Opting for a longer term fixed rate mortgage can limit your options if you plan to move during the fixed term. The lender who provided your mortgage may have been the best option at the time, but may not be the best option when it’s time to move. This lack of flexibility can be a disadvantage, and longer term fixed rates may require you to pay a large exit fee if the lender cannot accommodate you when you move.
Adding value to a property
If you’re considering making home improvements to increase the value of your property, opting for a shorter term mortgage such as a 2 year fixed rate can allow you to take advantage of lower loan-to-value (LTV) products once your fixed term ends. This is because your property value may have increased due to the improvements, and you may qualify for a better rate with a lower LTV. On the other hand, a longer term fixed rate will be based on the property value at the time of application for the full 5 year period, which may not reflect the increased value after the improvements are made.
How long should you fix your UK mortgage for in 2023?
In the current year of 2023, interest rates are relatively high compared to the past decade. If interest rates continue to decrease, opting for a 5-year fixed rate mortgage may result in paying more overall. However, past market trends have shown that the market can be unpredictable and change rapidly, and there is no guarantee that interest rates will continue to decrease.
So what is better 2 or 5 year fixed?
Determining the best mortgage product for you, whether it be a 2 or 5 year fixed rate or another type, is dependent on a variety of factors, including your attitude to risk, the prevailing market conditions, and your individual circumstances.
Without understanding your individual situation, it’s impossible to give a definitive answer to this question. However, it’s worth considering speaking with a mortgage broker to explore your options. Our team is available to discuss your needs and help you make an informed decision.