Is A 5 Year Fixed Rate Best? Or Should I Opt For 2 Years?
I often find myself in a discussion with clients over whether to fix for 5 years or go for a lower 2 year fixed rate option. Both are fantastically low options at the moment. I would say firstly that there is no one rule fits all theory which you can bring to this. Everyone will have a different scenario and different needs and plans for the future.
I spoke with some first time buyers recently. They were purchasing their first main residence for £250,000 and borrowing 90% against this. The difference between a 2 and a 5 year fixed rate would be around 0.70%. The 5 year fixed rate being about 0.70% higher than the 2 year fix. In general the longer you fix the rate for the higher the rate will be as the lender is guaranteeing the rate for longer.
Now we seem to be in a rising property market again. The Bank of England has announced that the UK is in a period of sustained recovery and Knight Frank had predicted that property prices are set to rise by 24% over the next 5 years. A 2 year fixed rate will give security in payments for the next couple of years whilst taking advantage of a lower rate.
Lenders price mortgage products according to risk and once the mortgage loan to value (amount borrowed compared to the purchase price or value) gets to 60%, each 5% increase in loan to value will push mortgage rates up a tier. Therefore in a rising market could it make sense to go for a shorter term fixed rate on a repayment mortgage with the idea that the mortgage balance will decrease slightly over the next 2 years whilst the property value should (fingers crossed) increase. Therefore in theory leaving you in 2 years time with a mortgage loan to value which has decreased by another 5% allowing you to access a cheaper tier of products.
The other factor to bring into the equation here is rate rises and whether we will see them in the next couple of years.
The Governor of the Bank of England Mark Carney has stated that interest rates will not rise until unemployment falls below 7% and recently announced that they may not even rise at this point. Unemployment currently stands at 7.6%, according to the Office for National Statistics, while inflation, as measured by the consumer prices index, fell to 2.2% in October.
No one can predict when interest rates will rise so taking a 2 year fixed rate could be a more risky option as rates could be higher in a couple of years time. However, even with a rate rise, would 2 year fixes be 0.70% higher? And if we also factor in a theoretical reduction in loan to value down to 85% this currently drops the interest rate by a further 0.74%.
There are other factors to consider such as lender arrangement fees and your personal situation, as a 5 year fixed rate might be genuinely a better option for you however, fixing for 2 years could be food for thought.
To discuss the best fixed rates available to you from the UK mortgage market please contact Fox Davidson on 01173 736200.