Why I would fix for five years

Five-year fixed rates offer brilliant value for money and great security

I have a confession to make. Despite claiming to know a thing or two about mortgages, and having written about them for a long time, it turns out I could have chosen better myself.

Back in July 2009 I bought my first property and chose what was, at the time, an absolutely brilliant mortgage -- a three-year fixed rate at 3.99% from NatWest with a £499 fee. Not only was this one of the best three-year fixed rates available at the time,  the fee was good and most importantly NatWest were more generous than many other lenders in terms of how much they were prepared to lend.

All in all I felt pretty smug and prepared for rate rises. Base Rate had been reduced to 0.5% back in March and by last summer I thought it was safest to lock into a fix before the Bank of England hiked rates.  How wrong I was. It’s now been at 0.5% for 19 months and there are few signs of it moving.

In fact, the consensus of leading economists is that the Bank of England Base Rate will stay at 0.5% until the middle of next year.

If that happens, it would mean that for two of the three years of my fixed rate, I would have been paying 3.99% compared to a Base Rate of 0.5%. Had I gone for a tracker deal, which were available for under 3% last year, (and now from 2.19%) I’d have been paying significantly less each and every month.

As it stands I can’t remortgage unless I pay around £3,500 in Early Repayment Charges to my lender -- that’s the deal with a fixed rate. But if I could switch, guess what? I’d do the same again. Only this time I would fix for five years not three.

Why?

Safety first

Firstly, it’s worth pointing out that despite my mortgage decision not being the cheapest (up to now), I am actually very happy with my choice. And of course, since I am currently only 16 months into a three-year fixed rate, there is still time for my deal to come good if interest rates suddenly soar. I don’t think they will, but I am still not concerned.

The reason is that I was very happy to pay a premium to get a secure rate for three years. I would rather pay more and know my monthly repayments cannot increase, than pay a cheap rate now but risk them rising to a level I could not afford. A cheap tracker may have cost me less in terms of cold hard cash, but it would have cost me more in terms of sleepless nights.

And that’s why I would certainly fix again, but I’d lock in for longer.

Fabulous five-year fixed rates

Interest rates only have one way to go, and whether you think that’s going to be this year or next year, they will definitely rise at some point.

It is impossible to predict where Base Rate will be in five years time, but it’s not unreasonable to assume that it will be back to its medium term trend of around 5%.

With five-year fixed rates below that level, they look pretty tempting right now.

The cheapest deal is just 3.89% from Yorkshire Building Society (see table below) but there is a wide range of mortgages at under 5%. Frankly, a five-year fix at under 5% is a great deal in anyone’s book – super cheap now, and historically.

I also believe that five-year fixes are not going to get any cheaper – they’ve pretty much bottomed out, meaning that if you are ever going to go for medium term security, now is a great time.

Because once lenders get even the faintest sniff of a Base Rate increase, or if swap rates rise any further (they increased throughout September) it’s likely that lenders will start to hike their fixed rates deals. If you want a good five-year fixed rate, get it now.

Not only will you get a reasonably priced rates, you will also benefit from five whole years of payment security, giving you invaluable peace of mind.

Count the costs

Also, think about the remortgage fees. With the average fee around the £900 mark, it’s a hefty cost to consider. Remortgage to a five-year fixed deal and you will pay that once before 2015. Go for short two-year rates and you will have to pay that twice in the same time period.

A two-year fix might look more appealing now but that won’t be the case in 2012 if the cost of fixing has risen during that timeframe (which is pretty likely). Mortgage rates only have to rise by a small amount (around 1.25% according to some estimates) to make a second two-year deal less attractive than today’s five-year fixes.

Frankly, if you believe the cost of borrowing will start to rise in two years' time, or sooner (I think that’s a pretty safe assumption), you should consider the advantages of a five-year fixed rate. That’s what I would do if I wasn’t tied into my current deal. And below are some of the best.

20 fantastic five-year fixed rates

*Discount of 0.24% available if you take out the lender’s home insurance policy

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