Have you always thought that a two-year fixed remortgaging deal was the best value? Think again, a five-year fixed remortgaging deal is better in most cases today.
Yes, that’s changed of late.
The difference in rate between the average two-year and five-year fix has now become almost negligible.
Today an average two-year fix will cost you 2.48% and a five-year fix 2.88%. That’s a small difference of 0.4%. (Source: Moneyfacts. Based on rates from 1 April each year.)
Fix and Save
In the past, the general rule was that the longer the fix of your remortgage deal, the higher the rate you would pay.
That was because it’s trickier for a lender to predict what will happen in the market over a longer period of time.
Traditionally borrowers have had to pay more for the security of knowing that their rate wouldn’t go up no matter what happens.
But the rise in the popularity of the fixed deal has caused lots of competition between lenders, driving rates down. making it easier to pick up a five-year fixed remortgaging deal.
Fixed rates are the most popular remortgaging product currently. They’re also at historic lows.
How Long to Fix For?
Fixed-rate remortgaging deals can last between one and 10 years. In fact, you can currently fix your rate for one, two, three, five, seven or 10 year-periods.
A fixed rate remortgage is a mortgage that retains the same interest rate for the period you’ve fixed it for.
That’s regardless of how much the lender raises or lowers its rates of interest or whatever happens with the Bank of England rate.
After the initial period, the interest you pay will go up as you are automatically transferred to your lender’s standard variable rate.
In February 2019, the average interest rate on a two-year fixed-rate mortgage was 2.78%, while the average SVR was 4.9%. What this means is that if you were to let your deal ‘slip’ onto the SVR, you would expect your repayments on an SVR remortgage to be significantly more expensive.
Avoid the Cost of Switching
For many years, the go-to choice for a fixed rate has been two years. People tended to feel safer hedging their bets with this length of time.
That is changing now and the uncertainty around Brexit is probably part of the reason why.
Homeowners are now more aware that we are in a time of historically low rates but that we also don’t know what could be round the post-Brexit corner.
More of us are concerned that we’ll come out of the fixed-rate period into a higher-rate environment.
Another incentive to plump for a low-cost 5-year fixed remortgaging deal over a low-cost 2-year fix is that the 5-year is likely to result in your paying less in the long run.
The chances are that even if nothing changed at all over the next five years, you would still better off overall with a 5-year deal. Why? The fees.
If you take out a new mortgage after two years, and then repeat the process after 4 years, you’ll mount up product fees (estimated at £1,998) alone over the period.
Everyone’s circumstance is different. The right mortgage for you will depend on everything from how much you’re borrowing, your age, your savings, your job security, your credit rating and your life positions.
But throw all this into the mix, the fact is that if a five-year fix suits your circumstances right now, it could well be a wise decision that will save you more long-term.