Mortgage applicants find it difficult to understand whether it is better to apply for a new remortgage deal for two years or five years. There are several factors that you need to consider when selecting two years or five years, mortgage deal.
If you have an existing mortgage on a residential or a buy to let property where your fixed deal is coming to an end, you would require to find a suitable mortgage deal before your fixed deal end date. If you are unable to find a fixed deal before the current deal end date, you will have to pay the standard variable rate, which is the higher interest rate of the existing lender.
Therefore, it is important to decide whether to apply for a new fixed deal for two years or five years.
Advantages of two years fixed deal
There are many advantages of applying for a fixed deal for two years. The most important factor would be that you will get the opportunity to review your mortgage in two years and see whether there are any cheaper, interest rates in the market.
Another factor is that you are not tied into a longer-term deal for three years or five years, which allows you to break the mortgage. Mortgage applicants might require to break the existing fixed mortgage if they’re planning to sell the property and move to a new one.
It could be due to unexpected personal circumstances or plans to move to a high-worth property. If the applicants are on a longer-term fixed deal. They will require to pay, an early repayment penalty when they are breaking the mortgage.
This is where the two years fixed deal is superior over the longer-term fixed is due to its flexibility with early repayment charges. With most high street lenders and building societies, the early repayment charge percentage is 2% for the first fixed year, then this would charge a 1.5% or 1% early repayment penalty for the final year of the two years fixed deal. It could be dependent on the lender.
Early Repayment Charges (ERC)
It is important that the applicants, understand the percentage of early repayment charge applicable for each year of the mortgage. Some applicants are not aware of the amount of early repayment charge, they have to pay. As a result that, they end up paying unexpected charges when trying to move to a new deal. An experienced mortgage advisor would always consult the applicants on the applicability of early repayment charges and the due time.
The interest cost difference in 2 years and 5 years deal
Another advantage of a two years fixed deal would be the interest rate would be lower compared to a five years deal. Therefore, the applicants could make a saving in terms of the interest cost, if they are proceeding with two years, fixed deal.
In terms of the buy to let property mortgages, the two years deals are usually cheaper than the five years deals. However, the buy to let mortgage loan amount affordability, could be lesser in the two years deal compared to a five years deal, depending on the expected monthly rental income and property value.
It means that applicants can have a better understanding of all these matters by speaking to an experienced mortgage advisor.
Implications of the product fee on 2 years and 5 years fixed-term deals
One of the main advantages of proceeding with five years, the fixed deal is that the product fee is applicable only for the five years. If an applicant is proceeding with a two years deal, they will have to pay a product fee after the two years. This is where the mortgage applicants would require the help of an experienced mortgage advisor,
They will consider the total cost in terms of interest cost and product fees, or any other applicable charges to see the suitable rate in terms of the total cost. The reason for the higher interest rate on the five years deals is that it applies the product fee over a longer period. Therefore, when the applicants compare the total cost using the interest cost and product fees, they can figure out the cheaper option for them.
Are you planning to sell the property?
If you are a mortgage applicant who is planning to buy a property now and sell the property within six months or after one year. It might not be suitable for you to apply for a longer-term fixed deal, it will result in the applicant paying early repayment charges, as they have to break the mortgage deal when moving out of the property. Therefore, you need to decide your future plans in advance before applying for a mortgage.
If you are a mortgage applicant who is buying residential property now, with the intention of converting it to a buy to let within the first two years of purchase, then you might, also need to consider the applicability of early repayment charges.
This is where some applicants, select tracker deals, instead of fixed mortgages, as most of the tracker deals would not include an early repayment charge.
However, it is important to note that tracker deals would always be a percentage amount higher than the Bank of England base rate. Technically, it would be a variable rate and the payment could vary from one month to another, based on the changes in the Bank of England base rate.
Overall, mortgage applicants need to consider several factors before deciding whether they should proceed with a two years deal or a five years deal. It would be a huge advantage to have an experienced mortgage advisor on your side when making this decision. They know how to compare the cost, or for the period, considered, and also to consider personal circumstances and future plans of the applicant.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up the mortgage repayments.
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