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Ask an expert: ‘How long should I fix my mortgage for?’

Find out how to choose between two, five and 10-year mortgage deals

Every week, Which?’s money experts answer your financial queries. You can submit your questions to money-letters@which.co.uk, or via our Facebook or Twitter pages.

Q: I’m thinking of buying my first home this summer, but I’m struggling to get my head around my mortgage options. What is the ideal length of time to fix a mortgage for?

Name and address supplied.

A. Choosing the right fixed term on your mortgage can be a complicated business, and in truth, it depends heavily on your circumstances.

While the Bank of England base rate remains at an historic low, longer deals might seem more tempting – but what happens if you want to move in a couple of years?

On the other hand, shorter fixes offer better headline rates, but you’ll need to do a lot more legwork, and take into account the costs of remortgaging.

Are longer fixed terms more attractive?

There are thousands of options in the mortgage market at the moment, and many deals offer near record low interest rates.

According to data from Moneyfacts, the average initial rates on both two and five-year fixed-rate mortgages are hovering well below the levels seen 12 months ago.

August 2015 August 2016 August 2017
Two year fix 2.68% 2.47% 2.24%
Five year fix 3.24% 3.08% 2.80%
Standard variable rate (SVR) 4.84% 4.80% 4.60%

Two-year fixed-rate deals

A two year deal might offer the best initial rate, but you’ll need to be proactive and remortgage before you hit your lender’s Standard Variable Rate (SVR).

If you fail to do this, you’ll face a significant hike in your monthly repayment.

Recent research from Citizens Advice showed that at the end of a two year deal, homeowners who didn’t remortgage faced paying £439 more each year.

Although the headline rates shown above are highly attractive, if you only have a small deposit a two-year fix might cost more than you expect.

As the table below shows, Initial rates for borrowers with a 5% deposit have increased by 0.35% since the start of the year.

Loan-to-value ratio January 2017 April 2017 July 2017
95% LTV 3.89% 4.14% 4.24%
90% LTV 2.72% 2.75% 2.77%

Five-year fixed-rate deals

With fierce competition in the two year market, the number of available five-year fixed-rate deals has increased over the last year.

These deals can look increasingly attractive for first-time buyers with small deposits, as rates remain stable when compared to shorter deals.

In the first half of the year, the average initial interest rate for buyers with a 5% deposit dropped from 4.63% to 4.58%.

10-year fixed-rate deals

In an uncertain economic climate, a 10-year fixed-rate deal offers repayment security in the long term.

Longer-term fixes have also increased in popularity. The number of available deals has increased from only a handful to well over a hundred in the past three years.

Unfortunately, the best deals aren’t available to first-time buyers, unless you have a deposit of at least 15%.

What are your plans for the future?

In truth, choosing the right fixed-rate mortgage term is as much about your future plans as getting the best interest rate.

While a longer fix offers protection against rate increases, it could be costly if your circumstances change or you decide to move home before the end of your fixed term.

Five and 10-year fixed-rate deals tend to offer portability – the ability to move your deal when you move home – but you’ll need to watch out for early redemption fees and be aware that you’ll be reassessed by your lender when you move.

Choosing a mortgage: the key questions to ask yourself

  1. How long am I likely to stay in my home? As a first-time buyer, think about when you intend to progress up the property ladder. If you’re hoping to make your second step in a couple of years or have a growing family, a longer-term fix won’t be right for you.
  2. How much security do I require? If you like the comfort of paying the same each month and want protection against future interest rate rises, consider a longer deal.
  3. Will I get around to remortgaging? If you get a two-year deal, you’ll need to be on the ball and remortgage before your lender’s SVR kicks in.

All mortgage data in this article has been sourced from Moneyfacts.

 

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