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Hook: Paying thousands more in interest by choosing the wrong mortgage term
When looking to secure your mortgage rate, choosing the right term becomes a delicate balancing act. Selecting a 2-year fixed deal could allow you to take advantage of lower rates down the line. However, with many experts predicting rates to fall as early as 2024, locking into a 5-year term may offer greater long term value. But get the decision wrong, and you could end up paying thousands more in interest over the lifetime of the loan. With so much at stake, this guide will break down everything you need to know about choosing between a 2 and 5-year fixed rate mortgage. From deciphering the mortgage rate crystal ball, to calculating how payments differ across terms, we’ll cover the fundamental factors that should inform your decision making. Equipped with this knowledge and weighing up your own personal financial situation, you’ll be able calculate potential costs and make an informed decision on which mortgage term is optimal for your needs.
The Mortgage Rate Rollercoaster
What’s happening to rates right now
After a period of historic lows, 2022 saw mortgage rates rapidly spiral upwards in the aftermath of the UK’s political and economic turmoil. This volatility was further fueled by successive Bank of England base rate rises over the past year, taking it to 3.5% – its highest level since late 2008.
But while this perfect storm sent the average 2-year fixed deal up to over 6% in October 2022, rates on longer term deals remained comparatively lower. According to Moneyfacts, by October the average 5-year fixed rate sat at 5.6% – 0.39 percentage points cheaper than the typical 2-year fix. As borrowers rushed to secure longer terms, this “inversion of the yield curve” was unseen over the past decade.
Predictions for the future
Fast forward to today, and the forecast is now far less gloomy. With inflation cooling down to 10.5%, all eyes will be on the Bank of England’s next interest move. Another rise seems unlikely in the short term, leading many experts to speculate that base rates have peaked. If correct, mortgage rates could start falling again by mid 2024.
In the more immediate future, lenders have already begun reducing rates after last year’s hikes. Although only marginal at present, should inflation continue its downward trajectory, more significant cuts are likely over the coming months. Still, a dramatic drop seems improbable this year. It’s far more likely that cheap deals may return in 2024 or beyond.
How Much Does the Mortgage Term Impact Monthly Payments?
Breakdown of payments at different LTVs
When assessing mortgage costs, the interest rate always take center stage. But with the option to fix that rate over 2, 3, 5 or even 10 years, the term length itself also plays a leading role.
To demonstrate exactly how much impact it has, we’ve compared average monthly repayments across 2 and 5-year deals at various LTV ratios. This factors in current average rates as well as total borrowing amounts based on the UK’s £291,000 average property price.
As shown in the table below, based on current average rates, 5-year fixes yield over £50 in monthly savings compared to 2-year deals at all typical LTV brackets.
Table comparing 2-year vs 5-year monthly payments
|Monthly payment (2-year fix)
|Monthly payment (5-year fix)
With just £50 a month extra here or there, a 2-year deal may seem tempting if you’re expecting to remortgage in a couple of years anyway. But when multiplied over 25 to 30 years, those small differences really add up.
Over the lifetime of the mortgage, that extra £50 per month totals over £15,000 in extra interest payments. And the higher the loan-to-value amount, the greater the long term costs incurred.
Key Factors to Consider When Choosing a Term
Likelihood of moving house
For most borrowers, mortgages come with early repayment charges – fees incurred for paying off your loan before the fixed term expires. While many lenders let you “port” the mortgage to a new property, this isn’t always seamless. ERCs combined with less flexible porting has the potential to limit your options when looking to move house.
So if upsizing or downsizing is on the horizon, shorter 2 year deals provide more exit opportunities. But if you don’t anticipate moving for 5+ years, longer terms allow you to lock into more favorable rates now without the hassle of remortgaging in just a couple of years.
Attitude to risk
As with most financial decisions, mortgage terms come down to personal risk tolerance. Those comfortable floating with the markets may accept cheaper short term fixes, planning to switch down the line if rates fall.
But for buyers who value longer term certainty, 5-year deals deliver peace of mind knowing your payments and interest owed is fixed for an extended period. So identify whether you’re willing to gamble on the markets and proactively manage your mortgage over time or would prefer set payments even if initially higher.
Getting expert mortgage advice
Between deposit amounts, LTV ratios, fixed terms and thousands of ever-changing products, the mortgage market is enormously complex for the average consumer to navigate. Seeking guidance from an expert mortgage advisor can therefore provide back the curtain on this confusing process.
An experienced broker will clarify the pros and cons around mortgage terms and make personalized product recommendations based on your unique situation. With access to exclusive rates and a deep understanding of eligibility criteria, they’re perfectly positioned to secure you the optimal deal. So don’t go it alone – let a broker compare the options objectively and facilitate the application.
Making the Final Decision: 2-Year or 5-Year Mortgage?
Weighing up the pros and cons
As breaking down the key considerations shows, both 2 and 5-year deals come with distinct advantages and disadvantages. To recap, shorter term fixes offer:
- Flexibility to take advantage of lower future rates
- Lower early repayment charges if looking to move Cons:
- Higher monthly repayments
- More frequent remortgaging admin every 2 years
While longer 5-year options provide:
- Lower monthly repayments
- Long term certainty fixing rates for 5 years Cons:
- Higher early repayment charges
- Potentially missing out on better future rates
When making the final call, you’ll need to weigh up these pros and cons against your personal situation, priorities and risk tolerance.
Questions to ask yourself:
If buying or remortgaging now, ask yourself these key questions when deciding on mortgage term length:
- Are you likely to move house within the next 5 years? If so, 2-year flexibility may be preferred
- Do you stay on top of finances and shop around regularly? A shorter fix may suit naturally saving-savvy borrowers
- Or do you value financial certainty without ongoing admin hassles? If so, longer 5-year terms offer peace of mind
- Are you comfortable risking rates moving in either direction? Shorter fixes provide potential benefits if rates fall but exposure if they rise
- How much do the monthly repayment differences from current average rates impact your budget? In many cases, 2-year deals may stretch finances further
Of course, the “right” mortgage term length comes down to personal priorities. But by analyzing the key considerations around monthly payments, flexibility, attitude to risk and expert advice, you’ll have the necessary clarity to determine whether a 2 or 5-year fixed rate makes most financial sense.
Summary and Key Takeaways
When getting a new mortgage, deciding on how long to fix your rate for is among the most critical choices. Get it right, and you’ll secure lower monthly repayments over the long haul. Get it wrong however, and you could pay thousands more in interest than necessary.
To avoid this outcome, your decision should balance current rate incentives with future expectations and flexibility needs. While no one has a crystal ball, the market sentiment is that cheaper deals may return over the next couple of years as base rates stabilize.
But even if significant drops do materialize, current 5-year fixes remain attractive, offering lower monthly payments across all typical LTVs. This comes at the cost of higher early repayment charges though, reducing flexibility if looking to move house.
So weigh up all these factors against your personal risk tolerance and financial situation before committing. Getting personalized recommendations from a mortgage advisor can provide expert guidance tailored to your precise needs.
But whether you got it alone or utilize professional advisers, take time to assess both 2 and 5-year products when financing a home. Identify the unique pros, cons and cost considerations of each to make a calculated decision you’re confident will serve your housing needs both today and for years to come.
Frequently Asked Questions
Q1: Which mortgage term usually has lower interest rates?
In the current market, 5-year fixed rate mortgages generally have lower interest rates compared to 2-year deals. Based on data from Moneyfacts, the average 5-year fixed rate sits around 0.4 percentage points below the typical rate for 2-year fixes.
Q2: Can you change your mortgage term later?
Most standard fixed rate mortgages lock you into the original term length. However, many lenders let you “port” your deal when moving home or switch to a new product for a small admin fee. There may also be limits around when you can do this without incurring early repayment charges.
Q3: What happens when my fixed rate mortgage term ends?
Approaching the end of your fixed term, you essentially have three main options:
- Remortgage to a new fixed deal with your existing or new lender;
- Switch to your lender’s Standard Variable Rate;
- Repay your remaining mortgage balance in full. Get in touch 6 to 12 months before your term expires to begin comparing your best options.