Fix your mortgage at 1.99%

It's not just variable mortgages which offer an incredibly low rate!

With Bank Base Rate stuck at 0.5% for more than two years now, and showing little sign of moving upwards any time soon, it’s no wonder that borrowers are tempted to sit and wait on their Standard Variable Rates, or sign up to variable mortgages with almost ludicrously low interest rates - some below 2%.

Yes, you read that correctly. Pay less than 2% on your mortgage? Who wouldn’t want to take the gamble of a tracker with rates like that on offer?

But now, even far less risky fixed rates are beginning to dip below 2%...

Fixing your rate at less than 2%

Last week Leeds Building Society unveiled its latest two-year fixed rate mortgage, with a rate of just 1.99% for borrowers with a deposit of 25%. OK, so the fee you’ll have to fork out is pretty punitive at £1,999, but for the sake of a rate like that, it’s not that surprising.

Indeed, the rates on offer on fixed rate deals have steadily crept down in recent months, with the average rate on two-year deals now just 3.82%*.

And it’s not just deals for borrowers with large deposits or big chunks of equity that are getting better. A study by Moneyfacts found that the average two-year fixed rate at 90% loan-to-value is now at its lowest level since January 2008, while five-year deals have fallen from an average of 6.87% six months ago to 5.87% today.

The pros and cons of fixing for the short term

The two-year fixed rate mortgage market, of which Leeds is now making the running, has long been a popular choice of British borrowers. The appeal is pretty simple to see. You get the security of knowing exactly what your mortgage repayment will be each month, so you don’t need to worry about what the eggheads on the Bank of England Monetary Policy Committee are thinking.

But you also have some flexibility. Two years isn’t that long a period of time, so when you get to the end of your deal you can search around for a better deal.

While this is a perfectly fine tactic when the mortgage market is healthy and competitive, it can be an expensive way of doing things. Each time you remortgage you’ll be faced with shelling out on a variety of new fees, as well as having to go through the rigmarole of searching the market to find that new deal. It’s no wonder that the cost of constantly remortgaging can hit £20,000.

There’s also the fact that, two years down the line, there’s a pretty good chance that Bank Base Rate will have started to rise. As a result, it’s highly likely that the rates on offer won’t be as good as they are now.

The case for fixing for the long term

That’s why it may be an even better idea to go for a far longer deal, of five years or even more. Not only do you secure a rate that historically is incredibly low, but you also don’t need to worry about wasting your time and money searching for new deals every couple of years.

There are negatives of course. The longer you want to fix your rate for, the bigger the premium you’ll have to pay. So a borrower with a 25% deposit can fix for two years at 1.99%, five years at 3.39% (with Yorkshire Building Society) or ten years at 4.19% (with Britannia). On a 25-year, £150,000 mortgage, that’s the difference between monthly repayments of £640, £742 or £826.

So if you go for a long-term fixed rate, but rates don’t increase much over your fixed rate period, you may end up spending more than if you’d stuck to short-term deals, even allowing for the additional fees.

And then there’s a question of flexibility. Before signing up for any long-term fixed rate, you’ll want to know whether the deal is portable (meaning it can be moved to a new property should you want to move), or what the early repayment charges are like, should you want to pay the whole thing off early.

The variable gamble

I like fixed rates because I like to know what my mortgage bill will be every month. I don’t need the ‘excitement’ that comes with a variable deal.

That said, it’s borrowers on variable deals that have benefitted the most over the past few years, and with the latest bout of quantitative easing suggesting there won’t be any base rate rise for a while to come, who’s to say they won’t continue to be the winners for the next couple of years?

There’s certainly a case to be made for grabbing a low tracker rate for at least a couple of years, even if it’s not something I’d personally want to do. Check out The perfect tracker mortgage for more.

In the meantime, here are 20 fantastic fixed rates:

20 fantastic fixed rates

*Research by Moneysupermarket

More: The £20,000 cost of constantly switching mortgages | The house price problem that's crippling the market

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

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.

Your home or property may be repossessed if you do not keep up repayments on your mortgage.