2 vs 5 year deals: Which is better for you?

Introduction

Traditionally, a two-year mortgage has always been cheaper than a five-year deal. However, in recent times, this trend has changed, with five-year deals appearing cheaper than two-year ones — at least on the surface.

Stay tuned to find out whether there’s a catch behind this trend.

Q1: Why Are Five-Year Deals Cheaper Than Two-Year Deals?

The main reason is that the swap rates in the market for a five-year deal are currently much cheaper than those for a two-year deal.

Swap rates determine the cost at which banks can borrow money for a fixed period. When the five-year swap rate is lower, it allows lenders to offer cheaper long-term mortgage deals compared to shorter ones.

Q2: What Are the Pros of a Five-Year Deal?

1. Rate Stability

The biggest advantage of a five-year deal is rate security. Your interest rate will remain fixed for five years, which makes budgeting much easier. You don’t have to worry about market fluctuations during this period.

2. Ideal for Those Not Planning to Move

A five-year deal works well for people who don’t plan to move houses anytime soon. Since these deals come with higher penalties for early repayment, they suit those intending to stay put.

3. Good Option for Smaller Mortgages

For those with small mortgage balances, five-year deals can be more cost-effective. Two-year products often come with product fees, and paying these every two years can make short-term deals more expensive overall.

4. Convenience

Some clients prefer longer deals because they don’t want to deal with mortgage paperwork frequently. Since two years pass quickly, a five-year deal offers peace of mind and convenience.

Q3: What Are the Cons of a Five-Year Deal?

1. High Early Repayment Charges (ERCs)

The biggest drawback is the large penalty if you need to exit the mortgage early.

Some banks charge up to 5% of the remaining loan balance as an early repayment fee.

For example, if you have a £500,000 loan, 5% equals £25,000 — a significant amount to lose. Therefore, you should think carefully before committing to a long-term deal.

2. No Benefit If Interest Rates Drop

If interest rates fall during your fixed period, you won’t benefit from lower rates.

Currently, five-year deals seem cheaper than two-year deals, but if two-year deals become cheaper in the next couple of years, you’ll miss out on those opportunities. That’s a key risk of locking in for the long term.

Q4: Who Should Avoid a Five-Year Deal?

A five-year deal may not be suitable for:

People who plan to move houses within a few years.

Borrowers with larger mortgages, as potential penalties and missed rate drops can cost significantly more.

Also, given the current market, you might be taking a chance — if interest rates drop further, you won’t be able to take advantage until your fixed term ends.

Q5: Why Might Five-Year Deals Be Cheaper Right Now?

A five-year deal could be cheap for a reason.

Banks may expect interest rates to drop after about two years. Therefore, by offering lower five-year rates now, they protect themselves against losing money when market rates fall later.

Remember, banks don’t offer cheaper rates out of generosity — there’s usually a strategic reason behind it.

Q6: What Should You Do Before Choosing a Five-Year Deal?

It’s always best to speak to a qualified advisor before making a decision.

An advisor can assess your financial situation, future plans, and risk tolerance to determine whether a five-year deal is the right fit for you.

A five-year deal is not suitable for everyone, and what works for one borrower might not work for another.

Conclusion

In conclusion, while five-year deals may look cheaper than two-year ones, it’s important to understand the reasons behind it and the potential risks involved.

Always consider your future plans, the size of your mortgage, and the possibility of interest rate changes before deciding.

Thank you very much for watching our video.