A two-year fixed-rate mortgage is the shortest fixed-rate period you can get in the UK.
What is a two-year fixed-rate mortgage?
As the name suggests, a two-year fixed-rate mortgage gives you a set interest rate for two years – after which your interest rate reverts to your lender’s standard variable rate (SVR).
Two-year fixed-rate mortgages offer some of the best interest rates on the market: as low as 1.39% if you can get together a 35% deposit (65% LTV), or about 1.69% if you have a deposit of 15% (85% LTV). This just about matches the lowest tracker mortgages, but with the added security that the interest rate will not change during the next two years, even if the Bank of England hikes the base interest rate – which currently stands at 0.75%.
One thing to bear in mind with fixed-rate mortgages is that you will be penalised if you try to clear some debt by overpaying, or if you sell your house or switch mortgages before the promotional period ends.
Each mortgage is different: some will let you overpay by a certain amount per year (usually up to 10%, for example) while others will penalise you for any amount of repayment. Usually the overpayment fee will be a percentage of the amount overpaid – but it varies from mortgage to mortgage, so be sure to check your paperwork (or pick up the phone and speak to your lender).
The early repayment fee is almost always a hefty charge – around 2 to 3% of the remaining balance on your mortgage. That might not sound like much, but on a £400,000 mortgage, for example, it could cost you upwards of £10,000.
What happens after the fixed rate ends?
The main issue with a two-year fixed-rate mortgage is that the cheaper, fixed rate doesn’t last very long. After two years have elapsed you’ll be moved to the lender’s SVR, which is between 4 and 5% right now. On a mortgage of £400,000 over 25 years, your repayments will go from around £1,300 per month to £1,900.
Instead of reverting to the SVR, you should seek out a new mortgage deal about two to three months before your fixed-rate period ends. Your current lender may offer you another fixed-rate deal, or you can remortgage and switch to another lender.
Also be aware that you’ll pay some fees if you get a new mortgage. Usually that’s about £1,000 for the booking or arrangement fee, £150ish for a valuation/survey fee, and potentially a booking fee of a few hundred as well.
What is the longest fixed rate mortgage I can get?
The longest fixed-rate mortgage deal in the UK is 10 years. You will pay a pretty hefty premium for financial security, though: the interest rate is usually about 1% higher than the best two-year fixed-rate deals.
But if you think you’ll be in the property for a long time – or your lender has stipulated that you have a portable mortgage, meaning you can take it from one property to the next without charge – knowing your monthly payments won’t increase for a decade could be worth the extra cost. That said, interest rates could always drop, so that “great deal” you took out may wind up looking rather expensive.
Are fixed-rate mortgages the best deals?
It’s hard to argue with a low interest rate that’s set in stone for a few years, regardless of whether the Bank of England changes the base interest rate.
You can usually find slightly lower interest rates if you’re okay with a discount-rate variable mortgage – today’s best discount-rate mortgage is 1% for two years, versus 1.24% for two-year fixed rate – but you run the risk of your monthly repayments increasing after the introductory period is over.
Can I get a two-year fixed-rate mortgage?
Yep! Two-year fixes are open to first-time buyers, remortgagers and homemovers alike. There are no particular criteria that you need to fulfil to be eligible for a two-year fixed-rate mortgage. As always, the best deals – usually those with the lowest interest rates – will only be available if you have a big deposit, ideally 20% (80% LTV) or more.
Don’t just get sucked in by the low rates though. Lenders will often try and recoup the money somewhere else, such as with high set-up fees, which can cost as much as £2,000.
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