29 September 2017

Should Borrowers Fix For Two Or Five Years?

MARK CARNEY, GOVERNOR OF THE BANK OF ENGLAND, TODAY HINTED THAT INTEREST RATES MAY NEED TO RISE AT THE NOVEMBER MEETING OF THE MONETARY POLICY COMMITTEE IF THE ECONOMY CONTINUES ALONG ITS CURRENT TRAJECTORY. SO SHOULD WORRIED BORROWERS LOOKING FOR A FIXED-RATE MORTGAGE FIX FOR TWO OR FIVE YEARS?

Swap rates – the rate lenders pay to borrow money – have risen in recent weeks on the back of comments from the Bank of England about the possibility of a rate rise. And new research out this week from comparison site Moneyfacts notes that this is having an impact on mortgage pricing, with the average two-year fixed rate rising to 2.63 per cent.

Meanwhile, longer-term fixes of five years are around 40 to 50 basis points more expensive, so it is clear to see why a two-year fix may appear more attractive to a hard-pressed first-time buyer in particular who wants to keep monthly payments to a minimum.

However, there are a couple of things to consider. The first is that the average two-year fix is 2.63 per cent; if you have a decent deposit, shop around and use an independent mortgage broker, there are several products still available closer to 2 per cent, which is incredibly cheap.

Borrowers may also benefit from a shorter-term deal if they plan to do work on the property and with hopefully some house-price inflation thrown in, the loan-to-value could be driven into a lower banding, so they benefit from lower rates when they remortgage in a couple of years.

However, if interest rates do rise over the next two years, when you come to remortgage it could mean that mortgages are more expensive. Borrowers could consider a longer-term fix now, giving peace of mind for an extended period of time, but only in the right circumstances. If there is a chance you might move in three years, for example, fixing for five years could result in early repayment charges if you need to get out of the mortgage early, so you may wish to opt for the shorter fix instead.

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