An important factor with mortgages is how long the mortgage is fixed for. If it’s a fixed rate mortgage it’s good to remember that the longer that the mortgage is fixed for, the higher the rate becomes.
If the cheapest possible fixed rate mortgage is being sought after then a two year fixed rate mortgage might be the right choice. The payments will be cheap but two years will pass by quickly and soon enough, a new deal will need to be found. If interest rates increase during this time then higher payments may happen at the time of renewal.
If applying for new mortgage deal is something that seems too much hassle then a five year fixed rate would be better. The payments would be stable for a much longer period. However, five year fixed rates are more expensive than two or three deals. A possible negative would be if interest rates fell during the fixed rate period then there would be no benefit from a reduction in monthly payments.
Whilst two year and five year fixed rates are the most popular between buyers, there is the option to fix for longer. Some lenders do offer seven or ten year fixed-rate mortgages. These long-term fixed-rate mortgages are not that popular in the UK. The property market can change quite drastically within a decade so it is understandable to not want to be hooked into a deal with the possibility of not being able to back out of it.
If circumstances change then it can cost money to repay a mortgage early. This is commonly known as an Early Repayment Charge (ERC). The ERC is often calculated as a percentage of what is owed. For example, if a £100,000 mortgage is going to be settled early then the early repayment charge is 2%, so a £2,000 penalty will be incurred for breaking the contract.
It’s often a mistake for customers to think about ‘beating the system’ or trying to predict what will happen to interest rates in the future. When choosing the right option for fixing a mortgage it is best to tailor it to the individual situation at hand. For example, is the possibility of moving house in Nottingham going to be on the table later down the line? Will home improvements be considered which may bring a lower loan to value at point of a remortgage in Nottingham?