The mortgage and property markets have been tricky to navigate for homeowners over the past few years. The pandemic and subsequent rises in inflation and interest rates have put many households under pressure.
One issue that many homeowners are facing up to at the moment is the dilemma between opting for a two- or five-year fixed rate when agreeing new terms on their mortgage.
According to This is Money, 1.4 million Brits will likely need to remortgage during 2023. They go onto mention that normally, five-year fixed rates are considered the more popular option compared to shorter — and typically more expensive — two-year fixed rates.
However, two-year fixed rates are becoming increasingly popular as many homeowners accept higher short-term costs in the hope that interest rates will drop in the near future.
Read on to discover what you might want to consider when deciding between two- and five-year fixed-rate deals.
The UK’s largest online mortgage broker reports over 50% of its customers are opting to fix for 2 years
Previously, five-year fixed rates were typically seen as the preferred mortgage option with approximately 70% of borrowers with L&C Mortgages opting for these kinds of deals. However, L&C Mortgages — the UK’s largest online mortgage broker — reports that, since November 2022, this figure has dropped to around 40%.
Instead, many homeowners are opting for two-year fixed-rate deals, with L&C reporting that over 50% of its customers have opted for the short-term option.
According to Moneyfacts, the best available rates for two- and five-year fixed-rate deals are 4.59% and 4.24% respectively (as of 16 May 2023).
So, why are homeowners opting for the potentially costlier option?
Homeowners betting on interest rates dropping in the next 2 years
According to Moneyfacts, many of the homeowners with deals maturing in 2023 are currently on fixed-rate mortgages with interest rates below 2%. So, they are facing the possibility of their mortgage rate doubling in the near future.
Opting for a two-year fixed-rate deal might come with a higher initial rate than a five-year deal — and may mean there will be additional associated costs if terms have to be agreed again in two years’ time — however it may offer homeowners greater flexibility.
The BBC reports that the IMF forecasts interest rates in major economies are likely to fall. Meanwhile, This is Money reports that the Bank of England (BoE)’s base rate is expected to drop to 3% in 2024 and 2.5% in 2025.
A two-year fixed-rate deal might be more costly now, but if interest rates drop as expected, it could leave you more readily able to remortgage on more favourable terms in two years’ time.
3 things to consider before opting for a two-year fixed-rate deal in 2023
1. If interest rates drop you may be able to remortgage closer to your previous terms, but the opposite could happen
If inflation drops over the next two years as expected, and interest rates fall accordingly, you may find a more attractive mortgage market in two years’ time when the two-year deal you take now matures. This could help you secure a longer-term deal at a better interest rate.
However, while forecasts do predict this may end up being the case, there is no guarantee. It is possible that interest rates may still be where they are today, or even end up increasing.
It should be noted, for example, that experts had forecast inflation to drop considerably lower than where it is currently by early 2023, however the process has been slowed by factors such as high food and drink costs.
David Hollingworth, associate director at L&C mortgages, encourages borrowers to use caution when speculating over future interest rates. He also points out it is highly unlikely that rates will drop to the ultra-low levels they reached during the early pandemic.
You should carefully weigh up how much fluctuation in mortgage rates you could potentially handle, so if rates do end up unexpectedly increasing in the future, you aren’t left exposed to terms you can’t afford.
2. A two-year fixed-rate deal could make it easier to move in the near future
If you’re considering a move in the next few years, then being tied to two-year fixed-rate terms might allow you to avoid early repayment charges (ERCs) once your fixed-rate terms have matured.
Sometimes, a mortgage is able to be “ported” over to a different property. However, this isn’t always the case, and might require the new home to be of a similar value and specification to your existing one.
A two-year fixed-rate deal could help you avoid expensive charges and added complications should you decide to move.
3. The cost of arrangement fees means you should carefully consider what rates will need to reach to make it worthwhile
It is important that you take the time to work out what you’ll potentially need interest rates to drop to in order for a higher cost two-year fixed-rate deal to make sense in the long term. This should also factor in any arrangement fees, as their cost might mean the cheapest rates don’t necessarily mean the cheapest deal overall.
Remember: don’t rush into any major decisions and allow yourself the time to carefully weigh up all the pros and cons involved.
Get in touch
If you’re worried about rising costs and potentially costly changes to your mortgage agreement in the near future, it is important to seek out expect advice to help you make the right choices for your overall plans.
It is vital you sit down and talk to a mortgage broker with experience in the sector to discuss your options.
If you have any questions regarding wider financial planning issues, you should get in touch with us by email mail@delaunaywealth.com or call 0345 505 3500.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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