Here’s what you need to know about Fixed deals: UK Mortgages

Host: Welcome to Let’s Talk Mortgages. Today, I’m here with Ifthikar Muhammad, who has been a mortgage adviser for over a decade. We’re going to clear up the confusion around which mortgage type to choose.

Q&A: Understanding Fixed Rate Mortgages

Pradeesh: What exactly is a fixed rate mortgage?

Ifthikar Muhammad: A fixed rate mortgage is where your monthly payment is fixed over a specific period of time.

• For example, if you take a 25-year mortgage but choose a 2-year deal, your interest rate is fixed for those 2 years.
• If you choose a 5-year deal, your rate is fixed for the next 5 years even though the mortgage term is 25 years.

This fixed period allows you to know exactly how much you will pay, which is helpful for budgeting.

Q&A: Should You Consider Fixed or Variable Rates?

Pradeesh: Looking at the current mortgage rates, fixed rates are higher. Is it still advisable to go for a fixed deal, or should we consider variable options as well?

Ifthikar Muhammad: Fixed rates are always popular because they provide certainty. Variable rates are chosen by people expecting interest rates to drop.

• Fixed Rate: You know your payments, and they won’t change. This helps with budgeting.
• Variable Rate: Could benefit you if rates drop, but you risk rates rising, which can increase your payments.

It depends entirely on your circumstances. If you plan to move house within a year, a variable or tracker deal may be better because they often allow you to break the deal with minimal penalties.

Pradeesh: For my own peace of mind, I would probably stick with a fixed deal to know what I’m paying for the next 2 or 5 years.

Q&A: Choosing Between a 2-Year or 5-Year Fixed Deal

Pradeesh: Many clients ask whether they should go for a 2-year or 5-year fixed deal. How should they decide?

Ifthikar Muhammad: It depends on individual circumstances:

• Traditionally, 5-year deals were more expensive than 2-year deals, but currently both are similar. Sometimes 5-year deals are even cheaper.
• Banks may offer cheaper 5-year deals if they expect rates to drop in the next two years.

Considerations:

• If you plan to move house in the next 3 years, a 5-year deal may not be suitable because breaking the mortgage early could incur penalties.
• If you plan to stay for 2 years, a 2-year deal might be better, as it allows you to potentially get a better rate when it ends.

Current Trend:

• Most clients prefer 2-year deals. They allow flexibility to change the rate if interest rates drop.
• 2-year penalties are lower (around 2% in the first year), while 5-year penalties start higher (around 5% in the first year).

Q&A: Benefits of a 2-Year Fixed Deal

Pradeesh: What are the benefits of a 2-year deal?

Ifthikar Muhammad:

• You are only committed for 2 years.
• If rates go down, you can switch to a better deal.
• Early repayment penalties are smaller compared to a 5-year deal.

Example:

• On a 2-year deal, breaking in the first year usually costs 2%.
• On a 5-year deal, breaking in the first year could cost 5%.

Q&A: Should You Fix a 5-Year Deal if Rates Could Rise?

Pradeesh: Interest rates are currently around 5%. What if they rise to 10%? Should someone choose a 5-year deal?

Ifthikar Muhammad: Choosing a 5-year deal protects you if rates rise. However, the current indications suggest inflation is under control, and interest rates may drop.

• Historically, interest rates have varied significantly.
• While a 5-year deal offers protection, the chance of rates jumping back to 10% is slim but not impossible.

Q&A: Renting Out Your Property During a Fixed Deal

Pradeesh: If I fix a mortgage for 2 or 5 years and later want to rent out my property while moving, what are my options?

Ifthikar Muhammad:

• You need a consent to let from your lender because residential mortgages are not automatically allowed to be rented out.
• Most lenders approve consent to let, but it’s discretionary.
• Always get advice if you plan to move within the next year, so your mortgage adviser can factor it into your deal.

Q&A: Factors to Consider When Choosing Between 2-Year and 5-Year Deals

Pradeesh: What should I consider when choosing between a 2-year and a 5-year fixed deal?

Ifthikar Muhammad: Consider:

• Risk Tolerance: 5-year deals are safer if you don’t want rate fluctuations. 2-year deals carry slightly higher risk if rates increase after 2 years.
• Personal Circumstances: If you plan to move house, it affects which deal is suitable.
• Income Stability: If your income won’t increase, a 5-year deal may be more comfortable.

There’s no one-size-fits-all solution. Discuss your circumstances with an adviser to make the right choice.

Pradeesh: Thank you, Ify. This really helps to clarify my options. For viewers, if you have questions about choosing between a 2-year or 5-year fixed deal, leave them in the comments or contact Wis Mortgages or your own adviser.

If you found this video informative, like, subscribe, and stay updated for more mortgage advice. This is Pradeesh signing off from Let’s Talk Mortgages.