Historically, choosing a 5 year or 2 year fixed mortgage was quite a straightforward decision to make for mortgage borrowers. Essentially, do you want to keep the mortgage with a competitive rate for a couple of years and then potentially move on to something different? Or are you in no rush to move on, and do you want to keep the mortgage for longer at a competitive rate? With the view of refinancing in the future if your plans have changed? It was often that simple. However, recent dramatic shifts in the mortgage and property market over the last 12 months+ has meant that mortgage brokers have conflicting opinions on the best loan fixing option.
Why Fix Your Mortgage?
The idea of fixing your mortgage loan is to secure a good, competitive rate of repayment that won’t risk changing over a number of years. Normally, with the help of a mortgage advisor, you would choose a specific mortgage product and rate and fix this rate in place for 2 or 5 years (some lenders potentially offer 3, 7, and 10 years). That rate will not change for that period of time, and you will hypothetically have the assurance that you are paying the best and most competitive rate for your circumstances.
If you don’t choose a 2 or five year fixed mortgage, you will most likely be on a variable rate mortgage which is not fixed and can go up or down. Most people want to avoid this as the variable rate can change at any time and could end up going quite high, meaning that your monthly mortgage payment could end up getting quite expensive.
Is a 2 Year or a 5 Year Fixed Mortgage Better?
One of the main concerns that borrowers have when securing a new loan is “should I get a 2 year or 5 year mortgage?” because, of course, no one can predict the future. Your circumstances could change drastically at any time, and you may find yourself wanting to sell the property or come away from your current mortgage deal before the fixed period has come to a natural end. In which case, you could end up having to pay an early redemption penalty.
When mortgage rates were low (1 – 3% generally) being on one specific rate for a number of years wasn’t too much of an issues, as most people could afford the level of repayment. However, since the mini-budget of 2022 and the subsequent mortgage rate hike across all lenders, rates of repayment have become less and less affordable. But, it’s not all doom and gloom, and thankfully rates do seem to be coming back down to a more manageable level in most cases.
Over recent months, the concern has shifted in borrowers from “should I get a 2 year or 5 year mortgage so that I can make a move if I need to?” to “should I get a 2 or 5 year fixed rate mortgage in case rates change again?”. A lot of trepidation and hesitation has been expressed by borrowers about taking longer or shorter fixed rate mortgages in case rates decrease or in worst case scenario increase again.
2 Year vs 5 Year Mortgage
So, is it best to get a 2 or 5 year fixed mortgage at this moment in time? Well this is a hot topic between mortgage brokers currently, and different brokers will recommend different things depending on the borrowers circumstances. The dilemma at the moment is that if someone chooses to fix for 2-years and rates go up over the next 24 months, they could risk coming off a cheaper rate on to a much higher one that they can’t afford in 2 years. For example, someone could secure a rate today at 3.90% but when their 2 year fix comes to an end in 24 months, the next best available rate could be 5% if there is a negative shift in the market again.
On the other side of the argument, if someone chooses to fix their mortgage rate for 5 years or more, there is also the risk that rates will drop much lower than they are currently paying and the borrower will be ‘stuck’ in their current deal, paying over the average for their loan. For example, you could secure a 5 year fixed rate deal at 4% today and within 12 months rates could drop as low as 3% but you might not be able to benefit from it because your deal is fixed for another 4 years. Breaking away from the contract early could cost you thousands in early redemption penalties.
Should I Take a 2 or 5 Year Fixed Mortgage?
On the flip-side of each argument above, other brokers argue the positives of a 2 year fixed vs 5 year fixed mortgage. At this moment in time, securing a 2 year fix could be very beneficial if rates do continue to drop as they have been doing over the last couple of months. Literally over the last 6 months we have seen rates drop from 6, 7, and 8% down to below 4% with a lot of lenders. If you secure a 2 year fix and rates drop by the time your deal comes to an end, you could end up snapping up a really low rate compared to what you had been paying. For example, your initial rate could be 3.90% fixed for 2 years. In 24 months the UK economy will hopefully have recovered from the shock of 2022 and rates could be down closer to 3%…or even 2%?
Some brokers are also arguing that a 5 year fixed option is absolutely the best way forward for borrowers in the current mortgage market. Their arguments? There has been no confirmation that the Bank of England base rate has peaked yet, and this means that we aren’t out of the woods yet with rate fluctuation. For borrowers concerned about rising interest rates and unmanageable monthly payments, fixing your mortgage for 5 years at the current rate offerings that are manageable for you is a safe option. These brokers potentially predict that it might take longer for mortgage rates to drop than many hope, so securing a 5 year rate now could be just enough time for you to move on to a much more competitive one in 60 months.
What Do Oportfolio Think?
At the end of the day, it all comes down to what you feel comfortable with doing. Everything we do in our work is with your best interests in mind and we will help you to get the best outcome for your mortgage, no matter what happens. That is why we would always say that how long you should fix your mortgage for will depend entirely on a case by case basis after thorough research and recommendations by ourselves. We take the time to get to know our clients, their financial situation and their wants and needs. We will then use this to help us to advise you on the best route forward. Whether that is a shorter 2 year deal or a longer 5 year fixed rate.
The best thing you can do if you are concerned about fixing your mortgage is to give our team of advisors a call today to see how we can help. Give us a call now for a free initial mortgage consultation or pop in to our office if you are local.