Five Top Two-Year Mortgage Deals

If you're looking for a two-year fixed rate, tracker or discount, this should help you figure out which one to go for.

Sick to death of hearing about the credit crunch? If you're about to take out a mortgage, no one could blame you for feeling depressed. According to the British Bankers' Association, the number of mortgages offered to borrowers slumped by nearly 50% last month, as lenders tighten their criteria and increase their interest rates. This means that, if you're coming to the end of a deal that you originally took out two or three years ago, you are likely to find the deals available to you now have a higher rate and are more expensive. But apart from feeling depressed, if you're in this situation, what can you do about it? Avoid The SVR Well, there's definitely one thing you shouldn't do -- and that's bury your head in the sand. Sorting out a new mortgage is not exactly an exciting task or one most of us enjoy, but it is well worth doing. Because unfortunately, if you do nothing, your rate may be automatically moved onto the lender's Standard Variable Rate (SVR). This is usually around 2% higher than the most competitive deals you can get by going to a whole-of-market broker, and could cost you as much as £2,000 a year, or more. Of course, it's all very well to say: take out a new deal. But which type of deal should you go for? The Best Two-Year Mortgage Deals First of all, let's take a look at deals which only tie you down for two years. These types of deals are popular because, after two years, you are free to remortgage onto a new deal without paying any penalties. If you need a mortgage of around £150,000 and have a deposit of at least 10%, the best* two-year fixed rates available at the moment are being offered by Lloyds TSB Scotland: Lender Rate Initial Monthly Payment True Cost Over 24 Months Min Deposit Product Fee Penalty** LLOYDS TSB Scotland 5.89% Fixed to 30/06/ 2010 £956.39 £24,047.36 25% £1,094 to 30th June 2010: in 1st year 3% of sum repaid, then 2% of sum repaid LLOYDS TSB Scotland 5.99% Fixed to 30/06/ 2010 £965.54 £24,266.96 10% £1,094 to 30th June 2010: in 1st year 3% of sum repaid, then 2% of sum repaid *Based on the total cost of the mortgage over 2 years ** If You Want To Remortgage Within 2 years As you can see, the bigger your deposit, the better the rate you can get. If you have built up a 20% stake in your home and currently have a fixed rate of 4.54% or higher, you may also want to consider HSBC's Rate Matcher offer. But is a fixed rate really the best type of deal? This type of deal fixes your rate at a set level, so it will never rise - or fall - with interest rates. Would you be better off with a tracker, which goes up when the Base Rate increases and falls when the Base Rate decreases? The Bank of England has already cut the Base Rate three times in the last six months. It now stands at 5%, and many economists are predicting it will fall even further - perhaps to as low as 4% within a year. Few expect it to rise. This makes trackers an attractive option for borrowers who have some flexibility in their monthly budget. (I would not recommend this option to any borrower on a tight budget, however, just in case interest rates did rise unexpectedly.) If you need a mortgage of around £150,000 and have a deposit of at least 5%, the best* two-year trackers available are: Lender Rate Initial Monthly Payment True Cost Over 24 Months Min Deposit Product Fee Penalty** MANSFIELD BUILDING SOCIETY 0.55% above Base Rate for 2 years (so currently 5.55%) £925.62 £23,463.88 25% £999 2% of mortgage advance BRADFORD & BINGLEY 0.94% above Base Rate for 2 years (so currently 5.94%) £960.96 £23,697.04 5% £0 2% of sum repaid *Based on the total cost of the mortgage over 2 years ** If You Want To Remortgage Within 2 years Alternatively, you could opt for a discount rate mortgage. These deals offer you a discount off the lender's SVR. If you need a mortgage of around £150,000 and have a deposit of at least 10%, the best two-year discount available is: Lender Rate Initial Monthly Payment True Cost Over 24 Months Min Deposit Prod. Fee Penalty** DARLINGTON BUILDING SOCIETY 1.28% discount until 30/06/10 (so currently 6.09%) £908.02 £22,466.48 25% £674 to 30/6/10: 3% of out- standing balance *Based on the total cost of the mortgage ** If You Want To Remortgage Within 2 years But personally, I'd opt for a tracker over a discount. With a tracker, lenders have to pass on any drops in the Base Rate immediately - with a discount rate deal, they don't. Work It Out Remember, all these `best buys' are based on the assumption you are borrowing £150,000. I chose that figure because it's the average amount we've found Fools borrow when they are remortgaging. Borrowing more - or less - than £150,000? It's easy to check how much each deal will cost you. Simply work out what your monthly payments would be on any of these rates, using our mortgage calculator. Then, to find out the total cost of the deal, multiply your monthly payments by 24 and add on the fees. You hadn't forgotten about the fees, had you? You see, that's the problem with two-year deals. Every time you remortgage, you are liable to have to pay a `product fee' (aka an `application fee'). In the last two years, mortgage lenders have almost doubled the size of these fees, from £509 to around £987. That means you'll shell out £12,831 in fees over a typical mortgage term.** What's more, you don't have long-term security with a two-year deal -- as borrowers who have been caught out by increase in rates due to the credit crunch know full well. With a long-term deal, such as a lifetime tracker or a 10-year fixed rate, you need never again worry about lenders suddenly withdrawing deals and putting their rates up. And you also would avoid the hassle, stress and expense of remortgaging every few years. To find out more about the advantages (and disadvantages) of long-term mortgage deals, then keep an eye out for Part Two of this article series: Six Top Long-Term Mortgage Deals. It should be arriving in your inboxes on Monday afternoon. Alternatively, you can generate your own best buy table by comparing the whole of the mortgage market. An easy way to do this is to use our Mortgage Search Wizard or, alternatively, speak to a fee-free broker at The Motley Fool Mortgage Service - and they'll do compare all the deals for you. More: Stop Buyers From Gazundering You | Capitalise On House Price Falls**Based on a borrower remortgaging every two years over a 25 year term.