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Two-year vs five-year mortgage fix: which is more risky?

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Written by: Christina Hoghton
14/06/2016
Interest rates are expected to stay low, but there may be trouble ahead so is it best to take out a two-year or a five-year fix?

A five-year fixed rate mortgage could prove a safer bet than a two-year deal, according to figures released from Moneyfacts.

The financial information provider said that buyers could be gambling on two-year fixes, because interest rates cannot stay low forever, and a raft of threats lie ahead. It suggested that those opting for a longer-term five-year fix could be quids in over the length of their fixed rate period.

Do the sums

Moneyfacts said that, compared with the lowest five-year fixed rate mortgage (1.99% from HSBC), someone borrowing £200,000 over 25 years would pay up to £8,428 more in capital and interest repayments over the first five years by taking out the lowest two-year fixed deal at 1.14% (Yorkshire Building Society), which then rolls onto a Standard Variable Rate (SVR) of 4.99%.

Of course, at that point many borrowers would actually remortgage to another two-year deal after the first one expires, but they still may not be any better off – rates could rise in the interim, which would push up the cost of their monthly repayments.

For example, a five-year fix at 1.99% would cost £50,804 over five years.

If you took a low two-year fix at 1.14%, followed by another at 2.58%, then reverted to SVR of 4.99% for one year you would still pay more over five years – £53,234.

Rachel Springall, finance expert at Moneyfacts.co.uk, said: “The market is full of uncertainty, and for that reason borrowers may find themselves better off with a five-year fixed rate mortgage rather than a two-year option.

“In terms of Base Rate, it is not now expected to rise until the end of 2019; however, in 2018 the Funding for Lending Scheme (FLS) will officially come to an end, which means that the cheap money lenders have had access to for four years will dry up, causing interest rates to rise. The upcoming EU referendum is also likely to have a significant impact, which means that the mortgage sector is likely to start changing well before the Bank of England increases Base Rate.

“First-time buyers also need to prepare for the end of the Help to Buy Mortgage Guarantee Scheme. Deals offered under this scheme will gradually fade away over the next six months, which could prompt lenders outside the scheme to begin to raise their interest rates for first-time buyers. Prospective buyers would therefore do well to weigh up their options now.”

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