2 or 5 Year Fixed Rate

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February 12, 2020

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Should I get a 2 year fixed rate or a 5 year fixed rate mortgage?

Interest rates have been reducing over recent years, but there are still many of our clients who are not sure which type of rate is best for them. We thought it would be a good idea to explain the advantages and disadvantages of the two year fixed rate and the five year fixed rate so you know which rate is suitable for you.

5 year fixed rates have always been higher than 2 year fixed rates and continue to be, but we have seen 5 year fixed rates decreasing quicker than the 2 year fixed rates over the last year. To put this into context, the average 2 year fixed rate fell by 0.08% in 2019, while the avergage 5 year fixed rate dropped by 0.2% (Which?, January 2020).

You may wonder why 5 year fixed rates are getting cheaper, this was partly down to the econominic and policitical uncertainy due to Brexit, meaning borrowers were opting for longer term security. However, we might start to see more borrowers feeling comfortable with the shorter, riskier fixed rates now that there is less uncertainty.

But which rate should I go for?

Two Year Fixed Rates

As mentioned above, these are the cheapest rates and give you the freedom to remortgage to a new deal or move house after as little as 18 months, making sure you are always on the best rate for you. This does mean you will have to make sure you are always on top of your mortgage to avoid going onto your lenders standard variable rate – however with Smarter Mortgages you never have to worry as we will be in contact around 6 months before your rate is due to expire to start looking into your next fixed rate.

Five Year Fixed Rates

The main attraction for borrowers to go for a five year fixed rate is that they offer more security than the two year fixed rates in the event of any interest rate rises. It also means you can ‘forget’ about your mortgage for about 4 and a half years. With this added security comes hefty Early Repayment Charges, up to 5%, so if your circumstances did change you could be paying a large penalty.

To summarise, if you are considering moving in the future, raising any capital for home improvement or your circumstances are likely to change then a 2 year fixed rate is suitable for you. If you are more risk advsere and know that your circumstances will not change in the medium term then a 5 year fixed rate is suitable for you.

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