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Fixing your mortgage rate: Is a two or five-year deal better?

Deciding between a two or a five-year fixed mortgage has just got more tricky as new analysis reveals the cost of repayments between the two deals has narrowed.


Borrowers often find mortgages with rates fixed for five years more attractive when they are looking for long-term certainty over their repayments, something which can prove beneficial if the Bank of England base rate goes up.


Meanwhile two-year deals, which offer a shorter-term option and more flexibility, tend to come with cheaper rates.


But new data published by financial data providers, Moneyfacts.co.uk, revealed the gap in average rates between these two types of deal has narrowed, with the difference in price at a seven–year low.


And this means longer-term options have begun to look more attractive when it comes to value.


Currently the average two-year deal comes with a rate of 2.49% while its five-year counterpart comes in at 2.85%. This is a difference of 0.36% which is much lower than the 0.42% gap between the two deals recorded in January and has had a direct impact on repayments.


According to Moneyfacts, a customer borrowing £200,000 over 25 years on an average-priced two-year fixed rate would be paying £896 per month.


The same customer, on the average five-year deal, would pay £932 – only £36 per month more than the two-year deal.


Ten year deals

To really mix things up, Moneyfacts also looked at mortgages which fixed customers’ rates for ten years. They found, using the same criteria, a customer could end up paying just £15 a month more by fixing for a decade.


Darren Cook, finance expert at Moneyfacts said: “Currently, mortgage rates appear to be competitive across the board allowing borrowers the flexibility to choose whether to fix repayments for either the short, medium or longer-term initial rate periods.”


Other factors to consider

Cook reminded borrowers of the importance of looking at other factors when choosing a mortgage, not just rates.


There is, for example, potential for greater fee expenses if borrowers opt for a shorter initial fixed payment term. What’s more, this will require borrowers to switch deals more frequently.

Borrowers should also consider early repayment charges if they are looking at locking into a longer-term deal.


Article by Kate Saines for www.whatmortgage.co.uk


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