Fixed rate mortgage: why now is the time to fix your mortgage

Two-year fixed rate mortgages are near to all-time lows. Should you snap one up?

If you are about to start looking for a new mortgage, then a two-year fixed rate is certainly worth a look. New research has revealed the average rates on offer have dropped to almost record lows.

According to data analyst Moneyfacts, the average two-year fixed rate now stands at a paltry 2.54%, compared to 3.13% at this time last year.

Borrowers with a decent deposit or equity in their property can fix at even lower rates. With the Base Rate at 0.5%, it’s hard to imagine fixed rates falling any lower. So now may be the time to secure your rate.

We’ve taken a look at the pros and cons of short-term fixed rate deals.

The traditional option

Two-year fixed rates have long been a favourite product among first-time buyers and homebuyers.

With a fixed rate mortgage you know that whatever happens to interest rates, your monthly payments will stay the same for the agreed period. This means fixed rates are a good option for first-time buyers budgeting for mortgage payments for the first time.

Rates on two-year fixed deals tend to be among the best on offer and are generally lower than three and five-year fixes. While longer fixed rates offer more security, in that you know exactly what your mortgage bill will be for a longer period, they do charge a fairly hefty premium.

Let's take an example. If you have 40% equity, then one of the best two-year fixed rate mortgages around at the moment comes from the Post Office.

It charges a rate of just 1.18%, with a mortage fee of £1,995. On a £150,000 mortgage, taken out over a 25-year term, your monthly repayments with the Post Office two-year fixed rate mortgage will be around £580. Over the fixed period, and including the fee, you'll pay about £15,915.

Let's contrast that to one of the leading five-year fixed rate mortgage for borrowers with the same deposit, which comes from First Direct. For a £1,450 fee you'll enjoy a rate of 2.09%. On that same mortgage, you'll face monthly repayments of around £647, and so over the first two years (and including the fee) you'll pay out £16,978. That's more than a £1,000 difference.

At the end of the fixed rate period your payments will generally revert to the lender's standard variable rate (SVR).

The pros of a two-year fixed rate

Most mortgage payments levy early redemption charges (ERCs) if you want to switch deals within the fixed rate period. These will vary from lender to lender. So if you opt for a two-year fix you’ll be tied in for two years, while with a five-year fix you'll have to pay a fee if you switch within the first five years.

So two-year fixes can be great for people unsure about their long-term future plans. Maybe you plan to move house within five years? At least with short-term fixed rates you're less likely to have to pay out ERCs.

Two-year fixes can also be a good option for people borrowing at a high LTV, depending on property prices in their area. Nothing’s certain, but if prices are rising then borrowers could be in a lower LTV bracket in two years’ time and be able to switch to a cheaper mortgage.

For example, if you borrow £80,000 to buy a £100,000 property, your LTV will be 80% and you’ll be restricted to mortgage deals in this LTV bracket. If, in two years’ time, your property is worth £120,000, your LTV will be 66.67% and you’ll have a bigger choice of mortgage products at lower rates.

And, of course, fixed rates protect you against changes to the Bank of England Base Rate. Borrowers on variable or tracker mortgages will see their payments increase if interest rates go up – but if you have a fixed rate your payments will remain the same for the entirety of your fixed rate period.   

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The downsides of two-year fixed rates

Since the Mortgage Market Review came into effect in April 2014, getting a mortgage has been much harder. Lenders go through borrowers’ affordability with a fine-tooth comb to check they can afford the mortgage.

Reverting to your lender’s SVR in two years’ time can mean a jump in payments and you’ll probably want to switch deals or remortgage – but do you really want to go through lengthy mortgage interviews and probes into your finances all over again?

Opting for a five- or 10-year fix can mean the hassle of remortgaging less often – and longer protection against interest rate rises.

It's also important to remember that two-year fixed rates tend not to be the cheapest rates available – that title goes to tracker rates. You can get a two-year tracker at the Base Rate plus 0.79%, giving an initial pay rate of just 1.29% with Accord Mortgages at 65% LTV. However, it's vitally important to remember that while this deal is cheaper today, it might not be if rates start to rise within the two-year period.

How to compare fixed rate deals

The first thing you should do when comparing mortgage products is work out the proportion of the property’s value you need to borrow: this is your loan-to-value or LTV. In general, the lower the LTV, the lower the rates on offer.

Big arrangement fees can mean that a cheap rate doesn’t necessarily mean a cheap mortgage, so it’s important to do the sums. This means working out exactly how much you’ll pay in total (monthly repayments plus fees) over the fixed term, whatever length of fix you opt for.

What are the best two-year fixed rate mortgages?

We've picked out some of the best rates currently on offer if you want a two-year fixed rate mortgage, across a range of LTVs and a variety of mortgage fees. For a more comprehensive look at the deals available to you, head over to the loveMONEY mortgage centre.

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