Take 5 and forget about your mortgage!

If you fix for five years you can sit back, relax and chill out about interest rates

If your priority with your mortgage is getting the cheapest monthly repayments possible, you are probably tempted by the wide range of super-cheap tracker and discounted rates available.

Or, if you already have a mortgage and are currently on your lender’s standard variable rate (SVR), it’s possible you are more than happy staying put -- after all many borrowers are sitting on very low SVRs indeed.

But there is one rather large problem with variable rates. They are variable, meaning they have a tendency to go up and down, usually in line with the Bank of England Base Rate. And that worries risk-averse borrowers, since the idea of rocketing monthly repayments is not exactly a pleasant one.

Which all explains why, despite record low interest rates of 0.5% for the last 16 months, a massive 47% of borrowers still opted for the safety of a fixed deal at the last count in May (up 1% on the previous month).

Fix it!

Over the last 16 months fixed rate deals have been significantly more expensive than tracker deals, and pretty pricey when you consider Base Rate has been so low. So it’s perhaps initially surprising that so many of us are still opting to pay a premium to get one, especially when rates are forecast to remain low for the next year.

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But there are two things to consider. Firstly, many of us just want security of payment and to know exactly how much our homeloan will cost for the next few years, even if we have to pay a bit extra for it.

Secondly, despite being expensive compared to trackers, fixed rates (indeed all mortgage rates) have been pretty low over the last two years when you compare them to the last 10. So even a fixed rate isn’t likely to break for bank for borrowers used to much higher rates of interest.

Even better, over the course of 2010 lenders have gradually cut away at their fixed mortgage rates, as competition has slowly returned to the market and the price of funding has fallen.

Now there is a good selection of cheap deals available to those who prefer to secure their monthly repayments and protect themselves from rate volatility.

But the question is, should you go for a short-term deal or fix for longer?

The long and the short of it

Of course, the correct answer is that it’s entirely up to you, since there is no best buy mortgage for everybody. Indeed whatever best suits your circumstances and attitude to risk, is the best mortgage for you.

But the general consensus among mortgage pundits is that long-term fixed rates could offer better value than shorter deals given the greater protection they provide against rising rates.

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In other words, although the best two-year fixes (from around 2.75%) are cheaper than the top five-year fixes (around 4%), the difference isn’t that great. For many it’s a price they are willing to pay for the extra three years’ peace of mind.

Plus the choice of deals is ever-increasing. This week Yorkshire Building Society stormed the best buy tables launching a new range of five-year fixes from 3.99% -- its lowest rate ever.

And it’s not the only one to have competitive long-term fixes. There’s a healthy choice for those who want to lock into a decent rate.

Plus, as well as peace of mind over fluctuating interest rates for a while, there’s another important thing you don’t need to worry about if you take a long-term fixed deal.

No more switching

One of the best bonuses of taking out a long-term deal is the ability to truly forget about your mortgage for the duration of your fix.

And this doesn’t just mean you can stop worrying about interest rates. You can also relax in the knowledge that you don’t need to remortgage again in two years, and then again two years after that.

Recent question on this topic

• b0ng0 asks:

  Looking for a joint mortgage with my fiance who is from China (working here permanently) - who would give the best deal?

  • 
    SoftwareBear answered "I'm surprised you can get a joint mortgage with a two year visa...."
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    b0ng0 answered "I was kind of suprised too. I believe HSBC don't even mind about the length of your visa if you..."
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Despite remortgaging being made easier over the last decade, let’s face it, it can still be a hassle. You still have to scour the market for a new deal, and work out what sort of mortgage you want.

Of course you can make this much easier by using lovemoney.com’s innovative mortgage tool, or enlisting one of our independent mortgage brokers to do the hard work for you.

But what you can’t do is avoid the cost of remortgaging. Even if you have no Early Repayment Charges to pay, you will still face an exit fee (which could be £100 to £300 for example), plus you will have to pay an arrangement fee to your new lender, and they currently average just under £1,000.

In other words, as well as the hassle of remortgaging there is also a serious cost to consider.

By fixing your rate for five years instead of two you save this, not once, but twice over the duration of your deal. So you can really take a break from worrying about your mortgage for the next five years.

Any drawbacks?

Of course, it’s only fair to point out that if interest rates remain low, you could feel like you are paying over the odds on a five-year fixed rate compared to a current low variable rate -- and you would be. But that’s the price you pay for the security of knowing exactly what your repayments will be until 2015.

It’s also worth noting that most five-year fixed rates will charge you an Early Repayment Charge (ERC) if you want to remortgage or pay off your homeloan within the first five years. And this could cost you up 4% of your outstanding balance.

But if you are comfortable committing to a five-year fixed rate for the duration of the deal, why not simply lock in and forget about your mortgage for a while?

Here are some of my favourite current deals:

 20 top five-year fixes

*Remortgagors get free standard valuation and legal fees paid; purchasers get free standard valuation and £250 cashback

More: Fix your mortgage at 2.69%! | House prices fall for third month in a row