Is it better to get a 2 year or 5 year fixed mortgage?

[mortygage]

Our mortgage is up for renewal in the next couple of months and I'm not sure whether to go for a 2 year or 5 year fixed rate?

Our current rate is 4.15% and I'm still kicking myself that I only took a 2 year fixed when it was as low as 1.8%.

Any advise on what the best option would be in the current climate?

Are you thinking of moving? Do you like security? Are your jobs likely to change?

Calculate the extra you would pay if the % changed by 1% and 2% after 2yrs then see if you happy to take the risk over that amount or lock it in now.

I think it's hard to tell. We decided to drop onto the flexible rate when ours ended last year but there weren't really any good deals around at the time. So ours is currently flexible.

I was also kicking myself for not taking out a 10 year fixed, but oh well you can't always see what will happen next.

Both mine and DH jobs are stable and we have no plans on moving (although are considering extending). I do like the security of knowing what I'm paying but would be annoyed if they feel away considerably.

I think rates might drop a bit but won’t go back to the crazy low levels of the last decade. Beyond that it’s down to your personal circs- how much is security worth to you, and is that more than what you’d save on eg a 0.5-1% drop. (Obviously no one knows what will actually happen but it’s at least a way to approach the question.)

None of us have a crystal ball. Taking a 5 year mortgage seemed like the sensible thing for me as a newly single parent. Knowing exactly what I was going to be paying suited me at the time. Unfortunately that deal came to an end when interest rates had shot through the roof!

If you choose a 5 year and your salaries are likely to increase over that time then find one that you can overpay by 20% without penalties. If you’re moving then find one that you can port to the new property. There are more considerations than the length of the term. Good luck!

For example, if you are borrowing £200k over 25yrs, a 5yr fix is around 4%

£200k, 25yrs, 5yr fix
4% = £1056

To fix for 2 years then go out to tender again for the remainder:

£200k, 25yrs, 2yr fix
4.5% = £1112

After 2yrs your balance will be around £190k

190k, 23yrs, fix depending on what you chose:
5% - £1160
4% - £1054
3% - 954

So for the first 2yrs you’d save £56 a month on a fixed 5yr, then if rates stayed at 4% you would be paying roughly the same so even whatever you do (if they went up you’d be winning!)

If you fixed for 2yrs you would overpay £56 for 2yrs, then if they went down to 3%, you would be saving £102 a month for 2yrs so overall saving £552 over the 4yr period, but then you would probably have to pay £1000 to switch your mortgage, so you’d be down £448 overall and have to pay again to move it.

Unless you want to move in the next 5yrs I think you’re better off fixing (or unless you have an extremely large mortgage and think interest rates will fall drastically then you might want to take the chance and only fix for 2yrs).

I expect rates to drop next year as a sweetener to higher rate taxpayers if all the taxes Labour plans to impose on them go through. I supect they may drop by 1% next year - if it’s a large mortgage I wouldn’t want to fix until nearer the time

Obviously it's a bit of a guessing game, if rates were to fall drastically you'd want to be able to swap onto a new rate in 2 years whereas if they rise again you'll be glad to have fixed for 5. For what it's worth my guess is rates will fall a bit more but quite slowly and unless you're wanting to move or massively overpay after 2 years you probably won't see a huge saving by going for the 2 year deal (bearing in mind you usually have to pay at least £1k in arrangement fees every time you remortgage so take that into account if going for shorter deals). I'm just remortgaging myself now and going for a 5 year deal...

Agree with @maxelly and I'm also in a similar situation and will most likely go for a 5 year fix.
Rates may drop but I doubt they'll drop to the very low levels that we've seen over the past few years so I'd personally prefer to fix and have that security for 5 years (plus as others have said, there are additional costs every time you re-mortgage)

We're in a similar position and so I am taking slightly more interest in the financial pages of the newspapers than I usually do

From what I have read the Bank of England is expected to reduce interest rates again this year.

The consensus seems to be reduction by 0.5% in total (probably 2 drops of 0.25%) , bringing it down to 4.5%. The next meeting of the Monetary Policy Committee is this Thursday, so we will see the direction of travel.

As others have said I dont think it will go back to the lower than 1% levels that we saw from 2008 to 2022 but dropping to 3.5% might be realistic within a year.

So we are waiting as long as possible to keep our options open...

How rate sensitive are you? For smaller mortgages, the higher fees needed to get the best rates can erode most of the benefits if you're remortgaging every two years.

We haven’t fixed and have gone on to a temporary tracker, we will wait and see what happens to rates. You don’t have to jump straight in to another fixed.

I've fixed for 5 years as I need the security of a fixed amount going out each month, no chance of my income increasing.

We locked into a 5 year deal in 2022 I think and I'm so glad we did. Prices had started to rise a little but nobody had any idea how far up they would go. The adviser said are you 100% sure, prices could go down. I replied that were were happy with the exact price we were going to be paying as it was a small mortgage and we valued the certainty of fixed payments over any money savings if rates dropped. We were also established in a pattern of over paying so pointed out that we would have the entire mortgage cleared by the last payment on the 5 year fix and they were more than happy to go ahead and do it for us.

Thanks for the advice folks, I really appreciate it.

Just for example, we bought our house for around £220K and have around £150K to pay off. The £220K is the valuation from when we first bought 6 years ago. Similar house on the street have sold recently in the region of £260-£290K.

I read that a fresh valuation would drop us down a lower band with regards to LTV, and hence a better fixed rate. Is this true? Doing the sums are LTV is currently around 73% but based on a new valuation could drop to 59%.

I don’t think there would be a lot of difference in terms of interest rates. Our LTV dropped to 50% and it really wasn’t much different.

You have a very small mortgage, I would definitely fix it for 5yrs.

In a very non technical way, I worked out what I thought the lowest the interest rate would go between 3 & 5 years and the 5 year rate and decided that the most I would be paying more on the 5 year rate would be x.. And it wasn't a huge amount so decided I'd rather have the peace of mind for 3 years that the possibility of the slightly less interest I might pay on a two year + the following 3 years.

Hope that makes sense

basically what I might possibly gain on a very low interest rate compared to the 5 year rate was minimal, so I chose the 5 year, for peace of mind

... and the LTV made naff all difference to the rates offered