When we provide mortgage advice to our clients, we often get asked how long should I fix my mortgage for? This really comes down to the rates available from the lender for two and five year fixed-rate mortgages.
The difference in rates between a two and five year fixed-rate mortgage can vary and this will result in a difference in monthly mortgage payments. Usually, the shorter-term rate will be less and may suit you if you are trying to keep your monthly costs down.
Why fix your mortgage rate?
One the biggest attractions of fixing your mortgage rate is the certainty it provides to your monthly payments and overall finances. The interest rate is fixed for a specific period and will remain at this rate irrespective of any changes that the Bank of England may make.
When you get to the end of your term you will be moved to the lender’s standard variable rate, which will be higher. This is normally the time you would search for another loan and will need to consider product transfer vs re-mortgage.
Currently banks are constantly reacting to the unpredictable environment and the interest rates between two-year and five-year fixed rate mortgages are at the closest levels in recent years.
Many believe there is an argument to go for a three-year fixed-rate mortgage as opposed to a five-year one if you think property prices will rise. When you make repayments on a mortgage you build up equity in the property so in the future you can move to a cheaper deal. Rates get lower as you move down to 90% then 85% loan-to-value. One thing to think about though is the mortgage term – if you have opted for a long term say 40 years, then you won’t have paid much off in those three years.
Advantages of Opting for a Longer-Term Fixed Mortgage
When it comes to your mortgage, choosing a longer-term fixed rate can offer several advantages:
Protection Against Interest Rate Hikes
The primary reason to opt for a fixed mortgage is the assurance that your interest rate remains constant for a specified period, whether it’s two, five, 10 years, or even longer. Regardless of how interest rates fluctuate elsewhere, yours stays locked in. This shields you from potential rate increases over the coming months or years.
Reduced Fees
Setting up a new mortgage often entails fees, with the arrangement fee being the most substantial. These fees can range from hundreds to over a thousand pounds. However, if you commit to a fixed rate for five, 10 years, or more, you’ll encounter fewer of these fees, especially when compared to those who frequently change mortgages every few years.
Protection Against Lender Criteria Changes
Mortgage providers may tighten their affordability criteria in the future, making it challenging to secure a competitive remortgage rate. A longer-term fixed deal can protect you against this, at least until the fixed period concludes.
Fewer Credit Checks
Applying for a new mortgage involves rigorous credit checks. It’s advisable to avoid applying for other credit products in the months leading up to remortgaging to prevent multiple applications from affecting your credit score. Longer-term fixes reduce the frequency of these checks, providing you with more financial flexibility.
Drawbacks of Committing to a Longer-Term Fixed Mortgage
While longer-term fixed mortgages offer many benefits, there are potential downsides to consider:
Possible Higher Costs if Rates Decrease
If interest rates decline in the years following your fixed mortgage agreement, you may find that opting for multiple shorter fixes would have been more cost-effective in hindsight.
Uncertainty Regarding Portability
Although many mortgages are portable, allowing you to transfer them to a new property without penalties, this is not guaranteed. If your chosen property doesn’t align with your lender’s criteria, porting might not be an option. In such cases, moving could result in early repayment charges.
Early Repayment Charges
If your financial situation changes, and you wish to clear your mortgage early, you may incur early repayment charges (ERCs). While most lenders permit annual overpayments of up to 10% of your total mortgage balance without ERCs, exceeding this limit could lead to additional charges.
Should I get a variable rate mortgage?
The alternative to a fixed rate mortgage is to choose a variable rate mortgage. Tracker mortgages are fixed to a set percentage above the Bank of England’s base rate.
Consequently, any changes to the Bank of England’s base rate will affect your monthly payments. You will need to be comfortable that you can afford any rise in interest rates during the period of your mortgage.
What should you do?
There is no right answer to how long you should fix for as it really depends on your circumstances, it’s not all about the rate. The less spare cash you have to meet rate rises and the more you value budgeting certainty, the more you might hedge towards fixing and fixing for longer. It is important that you review your current mortgage and ensure that it is the right mortgage for you and your circumstances.
If you would like help in reviewing your current mortgage or are looking to purchase a new home and would like to discuss the options available to you then the Resolve team would be pleased to help you through the process. Please get in touch for a no obligation initial discussion.
Please note: Your home maybe repossessed if you do not keep up repayment on your mortgage.