A two-year mortgage will break your heart

They used to be the sweetheart of the nation's homebuyers. But a two-year mortgage is not the catch it used to be.

It’s the end of the affair. The long-running love match between the British homeowner and the two-year mortgage is finally over, finished off by the financial crisis.

And a good thing too. It won’t be missed.

Taking out a mortgage is a big commitment. The two year deal has always been the equivalent of a quick fling, when you should be looking for something more enduring.

It’s time to walk away.

When love breaks down

The two-year fixed rate or discounted variable rate has been the nation’s mortgage sweetheart for years, but we are casting it aside without a backward look. The proportion of homeowners taking out a two-year deal has now dropped to a record low, according to brokers John Charcol.

Quite right too. This is a lousy time to fall in love with a two-year mortgage, because it will almost certainly end in heartbreak, late in 2013.

Looks don’t last

Two-year fixed rates can still turn heads, with fixed rates starting at 2% and discounted variable rates starting at 2.5%. But don’t be seduced. Most analysts expect the Bank of England to hold rates at their current 0.5% until 2013, in a bid to save the UK economy. At that point, they will start rising, possibly quite rapidly.

If you take out a two-year mortgage today, it will leave you just when you need it most.

Crazy in love

Taking out a two-year fixed rate is madness, because you are paying for security you almost certainly won’t need. Base rates are unlikely to rise during the term of your mortgage, but could shoot up the moment it ends.

Say you are seduced Leeds Building Society’s two-year fixed rate, which charges a luscious-looking 1.99% up to 75% loan-to-value (LTV). It’s hot stuff, but after two years you will be lumbered with the society’s standard variable rate (SVR) which is an ugly 5.69%.

Once base rates start rising, it will look even uglier.

What a minger!

A two-year discounted variable rate could leave you similarly bereft.

Mansfield Building Society’s two-year discounted rate looks tempting, with an initial pay rate of 2.5% up to 80% LTV. But it could prove a turn-off in a couple of years, when you revert to the lender’s SVR, which is a hairy 5.69%.

Do you fancy getting stuck with that minger just as base rates start rising?

Love in a cold climate

Late 2013 could be a lonely time to find yourself back on the mortgage market. If the economy is still struggling, credit conditions could be even tighter and lending criteria tougher.

If the value of your home has fallen you might need a higher-LTV mortgage, because you will have less spare equity.

Who knows, you might have lost your job, or had a couple of pay freezes, and won’t be able to borrow as much. Or you might have fallen behind on some repayments, and damaged your credit record.

As far as lenders are concerned, you will have lost your looks.

A high price to pay

There’s another reason why homeowners should shun two-year mortgages. Cruising for a new deal every two years is expensive. That two-year fix from the Leeds carries a hefty £1,999 arrangement fee. Do you want to be shelling out that kind of cash every couple of years?

Talk about high maintenance.

Enduring love

If you want the protection of a fix, consider taking the plunge and committing for five years. It will cost you more than a two-year fix (that’s the price of commitment) but should prove more rewarding in the longer run.

If you are willing to commit for ten years, Yorkshire Building Society offers a ten-year fixed rate charging 4.19% of up to 75% LTV, with a £995 arrangement fee.

Fast forward to 2017, when base rates have returned to their long-term norm of 5% or 6%, and all your friends are paying SVRs of 8% or 9%. Think how much you will love your mortgage then. You will also have saved a packet on arrangement fees.

Fixing for that long takes devotion, it isn’t for everybody.

Trackers, no tears

As people expect base rates to stay low for longer, variable rates are currently more popular than fixed rates. They account for two out of three new deals, according to John Charcol.

Lifetime trackers are the most popular type of variable rate. You can see why, with HSBC offering a lifetime tracker at a variable 2.49% up to 60% LTV, and 2.99% up to 80% LTV.

Better still, no arrangement fees. And no ugly SVR to worry about either.

Or you might prefer a fresh and foxy “hybrid” mortgage. This starts off as a slinky two-year tracker rate then slips into a nice and comfy three-year fix, just at the right time.

Who says you can’t have it all?

What becomes of the broken-hearted?

The two-year mortgage has lost its charms. Homeowners have already moved on. Certain mortgage brokers are the only ones who are crying their eyes out. They were crazy for them, because they knew their client would be back in two years to fork out another fat fee for their services.

Brokers may lament the end of this affair, the rest of us shouldn’t.

More: It's obvious today the property market has slumped! | New crisis hits the housing market

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This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

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