Should you be considering 5-year fixed rate mortgage?
As mortgage brokers we are always looking to make the best recommendations for our clients. During periods of economic uncertainty such as this, it is crucial to look further forward than usual and provide a failsafe in case the situation devolves into something far uglier.
The UK mortgage market is notoriously short-term in comparison to other countries around the world. For instance, our cousins in the US would typically fix their mortgage rate for a period of 10 years up to as many as 30 years.
This is a stark contrast to what tends to be the ‘norm’ here in the UK where many mortgage applicants find themselves debating between the benefits of 2 year and 5 year fixed-rate products.
Why would you fix for 2 years?
In recent years we have been enjoying consistently low mortgage rates which is probably why 2-year fixed-rate products have been so popular. They enable the borrower to have the flexibility to move to a new product once their initial fixed-rate ends, and potentially find a lower rate for the next period.
ERC’s (early repayment charges) are payable if you decide to redeem a mortgage during your fixed-rate period, so having a shorter-term fixed rate means you are only liable to pay the ERC for this shorter term.
Alternatively, if you were on a 5-year fixed product and wanted to re-finance after 2 years then you would have 3 years left of being liable to pay the ERC.
So short-term fixed rate products offer better flexibility, and on top of that, they often have a lower rate of interest for the initial period, making them an attractive option when initially signing up for the loan.
Changing marketplace
The demand for 2-year fixed rate products is quickly drying up, and when you look at the state of the economy, it doesn’t really come as a surprise.
Homeowners in 2022 need security more than ever. With prices rising consistently, the need for stability of payments has never been greater.
Whilst the Bank of England is doing what it can to combat soaring inflation, the Banks governor has warned of “apocalyptic” food prices and has said that he feels “helpless”. Not exactly the vote of confidence we all desperately needed to hear.
This is leading to further speculation that the Base Rate will see further increases until we flatten the curve on inflation.
Why fix for longer?
As the outlook continues to dim, having a longer term of stable payments becomes more and more attractive. Whilst you will sacrifice some of the flexibility you would enjoy on a shorter fixed-rate product, you can relax in the knowledge that regardless of what happens, your mortgage repayments will be protected from interest rate rises for the duration of your 5-year fixed-rate mortgage.
Let’s be honest, if an energy company offered you fixed tariff today, you’d probably take it wouldn’t you? So, apply this same sentiment to your remortgage and you’ll understand why more and more homeowners are opting for 5-year fixed mortgages than 2.
What about those lower interest rates?
Despite 2 year fixed-products being historically cheaper than 5 year fixed-rate products, it appears that the trend is beginning to change.
Since the MMR (Mortgage Market Review) in 2008, lenders have been required to practice ‘responsible lending’. Arguably, incentivising borrowers to take a shorter fixed-term product by offering a lower rate of interest could be deemed as irresponsible in the current climate. This could be one factor which has influenced many of these lenders to bring their 5-year fixed-rate products in line with their 2-year fixed-rate products.
Some high-street lenders have even been offering 10-year fixed-rate mortgage products which compete with 2- and 5-year deals. Therefore, the reasons to fix for a shorter period are quickly diminishing.
How about you?
No two people are the same, and neither are two mortgages. Whether you are concerned about rate rises or are curious whether you are making the maximum amount of savings possible, you will need to speak to an advisor to get the best advice for your circumstances.
We can help you research and compare between all the best mortgage products available to you before choosing to move forward.
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0800 8620 840
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