A fixed rate mortgage can give you the security of knowing exactly what your mortgage repayments will be over a certain period of time.

But should you go for a 2 or 5 year fixed mortgage? Or even a 3, 7, or 10 year one?

To help answer this question, let us take you through the pros and cons of short term and  long term fixed mortgages.

Fixed rate mortgages: a refresher

When you take out a mortgage, each month you pay the lender part of your loan plus interest. Interest is essentially the ‘fee’ your lender charges to let you borrow their money, calculated as a percentage of the balance you have remaining on your loan. 

Getting a fixed rate mortgage deal means you’ll pay a set amount of interest on your mortgage loan, for a set period of time. So with a fixed mortgage, you have the advantage of knowing exactly how much your monthly repayments will be, for however long you choose to fix for. This can make managing your budget a lot easier.

While 2 and 5 year fixes are popular choices, you can also get deals for 3, 7, or 10 years – or even longer.

One downside of this type of mortgage is that, usually, you’re locked into the deal. That means you can’t get out of it before the fixed rate period ends without paying substantial early repayment charges (ERCs). These charges can be as high as 5% of the amount left to pay on your mortgage if you leave in the first year.

When your fixed rate ends, your lender will put you onto a much more expensive rate called the standard variable rate. To get out of this, you can remortgage (switch to another fixed deal).

Pros and cons of 2 and 5 year fixed mortgages

2 year fixed mortgage

Pros:

• Lower interest rates: these deals typically have lower interest rates than longer fixed term deals. Having said that, recently the gap between interest rates for 2 and 5 year fixed mortgages has really narrowed, making 5 year deals look more attractive.
  
  
• Short term commitment: these mortgages are a good choice if you think you might move home after a couple of years or if your circumstances might change in another way. You’re not locked into a long term commitment.
  
  
• Opportunity to remortgage sooner: you might have the chance to remortgage and get a better mortgage deal after 2 years if banks and other lenders are lowering their interest rates.

Cons:

• Interest only fixed for a short time: you’ve only got 2 years of fixed interest before your deal ends, at which point you’ll be transferred to your lender’s (often much higher) standard variable interest rate.
  
  
• Extra fees to remortgage: if you decide to remortgage your home to get a better deal once your fixed rate period ends, this is likely to involve additional costs.
  
  
• New mortgage may not be so attractive: during your fixed term period, banks and other lenders might have raised their interest rates, making it harder for you to get a deal that’s as good as your previous one.

5 year fixed mortgage

Pros:

• Long term stability: with a 5 year fixed rate deal, you’ll have a longer period of financial stability. This is especially useful in times of economic uncertainty, when interest rates are fluctuating a lot. Longer term fixed rate deals are also available (up to 40 years with the Habito One mortgage).
  
  
• Good choice for a forever home: a longer term deal can work well if you’re confident that you’ll be staying in your home for the next few years.
  
  
• Beat rising interest rates: going for a long term fixed rate deal can be a shrewd decision if interest rates are predicted to start rising soon.
  
  
• Avoid the hassle of remortgaging: unlike with a 2 year fixed mortgage, you won’t face the fees or the paperwork of remortgaging after only a relatively short time.

Cons:

• Higher interest rates: you may be paying a higher interest rate than you would with a 2 year fixed rate deal. But the gap between interest rates for 2 and 5 year fixed mortgages has narrowed over the last few years.
  
  
• Long term commitment: it’s a less flexible option if your circumstances change and you need to move home. You might be able to transfer the mortgage to your new property, but if you can’t, you may face early repayment charges for moving.
  
  
• Unable to take advantage of falling interest rates: If banks and other lenders lower their interest rates during your fixed rate period, you won’t be able to take advantage of that for a while. You’re committed to paying a specific rate of interest until the end of the 5 years.

When comparing mortgage deals (fixed or variable rate), look beyond the interest rate. Some mortgage lenders will charge a lower interest rate but then balance this out with a high mortgage arrangement fee (£1,000 to £2,000 or more). Make sure your calculations take this into account. A broker like Habito can help you figure out the real total cost.

So, to sum up. If you want to take advantage of lower interest rates and you’re happy to remortgage again relatively quickly, a 2 year fixed mortgage deal might be a good choice for you. But, if you’re looking for long term stability and you’re willing to pay a bit more interest to secure that, you could consider a 5 year fixed mortgage – or even one with a longer fixed period.

Want the benefits of a long term fixed mortgage without the drawbacks?

The Habito One mortgage lets you lock in an interest rate for the long term (up to 40 years) without the usual strings attached. That is, you can easily pay off your mortgage sooner, leave the deal if you change your mind, and take the mortgage with you when you move home. 

Interested? Chat to us today.

Should you choose a variable rate mortgage instead?

A fixed rate mortgage isn’t the only type of mortgage available. There are also several different types of variable rate mortgages you could opt for.

With a variable rate mortgage, your interest rate may go up or down from month to month. That means your monthly payments can also go up or down.

How much your interest rate rises and falls depends partly on rates like the Bank of England’s base rate, which dictates loads of mortgage rates, and partly on your lender’s own preferences. 

It’s more unpredictable than a fixed rate mortgage, but it may end up costing you less overall. That’s because there’s the potential for your interest rate to fall, resulting in lower monthly repayments.

These are the most common types of variable rate mortgages:

• Standard variable rate mortgage: Technically, this isn’t a type of mortgage – it’s just the mortgage your lender will automatically transfer you to at the end of your fixed term deal (if you haven’t arranged to remortgage your home). Their standard variable interest rate is usually quite a bit higher than the fixed rate you’ve been enjoying. And, as with all variable rate mortgages, it can go up and down.

One advantage? If you want to pay off some or all of your mortgage loan early or remortgage with a new lender, you can do that while you’re in your SVR, with no early repayment charges.

• Discount rate mortgage: With this type of deal, your lender will give you a discount on their standard variable rate for a certain period (often 2 or 3 years). So the amount of interest you pay will still vary, but you’ll be paying a bit less than you would otherwise.
  

• Tracker mortgage: Getting a tracker mortgage deal means that your interest rate is guaranteed to follow (or “track” – see what they did there?) an external rate, like the Bank of England rate. Usually, it’s a little higher than the external rate it’s tracking, but it will rise and fall in the same way (your lender can’t just change it when they feel like it).
  

As with a fixed rate mortgage, you’ll be committed to the tracker mortgage for a certain period. And if you want to leave early, you’ll probably face early repayment charges. 

Ultimately, a variable rate mortgage might work for you if you want a bit of extra flexibility or you think you might benefit from falling interest rates.