7th July 2023

Should I apply for a 2 year mortgage or 5 year Mortgage?

Traditionally a 5 year mortgage rate has been more expensive than a two-year fixed deal. However, in the recent past due to the volatile economic climate, the five year mortgage rates appear to be cheaper than a 2 year-fixed deal. Let's now find out about the pros and cons of a five-year deal and see if it suits you.

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Is a 5 year deal more advantageous?

The main reason why people go for a five-year deal is that you're guaranteed a fixed rate for five years. This makes it perfect for budgeting purposes because the rate will not change over that period. A five-year deal works well for people who do not plan to move. However, five-year deals generally have bigger penalties than two-year deals. So, if someone is not planning to move for a long time, a five-year deal may work well for them. Longer-term deals also work well for people with small mortgages. If your mortgage amount is very small, a five-year term might be more cost-effective since taking a two-year product could mean paying product fees over the years, which may end up being more expensive. Therefore, if someone has a smaller mortgage, it might be a good idea to consider a five-year mortgage.

Five-year deals also work for people who value convenience. I have clients who tell me, "I don't like dealing with paperwork too often because two years come around quite fast." So, for people like that, five-year deals might work as well.

The biggest drawback is the massive penalty if you want to exit the mortgage. Some banks charge up to five percent if you want to come off the mortgage. That's not ideal. For example, if someone has a loan of about five hundred thousand, five percent of that is 25,000 pounds. That's a significant amount to lose. Therefore, you may want to think twice before signing up for a long-term deal. Another reason to reconsider a five-year deal is that if the interest rate drops, you may not benefit from it. Currently, five-year deals seem cheaper than two-year ones. However, what if two-year deals become cheaper after two years? You might miss out on the cheaper deals available. That's the risk you take when signing up for a five-year deal.

In conclusion, a five-year deal may not work for people who want to move houses and those with a large mortgage. Therefore, for people with bigger mortgages who intend to move, five-year deals may not be the right solution. Additionally, with the current five-year deal, you're taking a chance because if interest rates drop further, you will not benefit in the future.

If you're considering a five-year deal, it's always best to speak to an advisor. Advisors can tell you if it's the right solution for you because a five-year deal is not suitable for everyone. Remember, a five-year deal could be cheap for a reason. It might be cheap because the banks are expecting interest rates to drop after two years.
In situations like this, it's always best to speak to an advisor who can provide advice based on your circumstances and help you make the right decision.

As a mortgage is secured against your home, it may be repossessed if you do not keep up the mortgage repayments.

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