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5 year fixed rate mortgages

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What is a 5 year fixed rate mortgage?

A 5 year fixed rate mortgage is a home loan where the interest rate is fixed at a set percentage for the first five years. This can give you peace of mind because you’ll always know exactly what your monthly repayments will be during that 5 year period. 

Having certainty about what you'll be paying every month can make it much easier to manage your finances. It can also help you work out how much money you’ll have left over each month for luxuries, such as eating out.

Alternatives to fixed-rate mortgages are variable-rate types, such as trackers or discount mortgages. With these deals, the rate can go up or down, either by directly tracking the Bank of England base rate or in response to changes to it.

How to find the best 5 year fixed rate mortgage

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Do I need a larger deposit for a 5 year fixed-rate mortgage?

You’ll usually get a cheaper mortgage if you have a lower loan-to-value (LTV), which is the proportion of the property’s value you’re borrowing. This is because the lower the LTV, the less risky the loan is for the lender. So if you’re buying a £200,000 home with a £50,000 deposit and a £150,000 mortgage your LTV will be 75%.

The best rates are offered on LTVs of 60% or less. As a result, while there is no actual requirement to put down a bigger deposit with a 5 year fixed rate mortgage than any other type of deal, it’s worth trying to save a deposit of at least 40% of the property’s value if you’re taking out your first mortgage. 

If you’re moving home or remortgaging, the equity in your current home will make up the deposit for your new mortgage, although you could choose to add to it with your savings.

As interest rates are higher on 5 year fixes compared to shorter-term deals and higher than variable-rate mortgages – at least at the start – you’ll also offset the higher repayments by having as big a deposit as possible.

Should I fix my mortgage for five years?

Choosing a 5 year fixed rate means not having to worry about rising interest rates pushing up your monthly repayments for the 5 year period, although the interest rate can be higher than with shorter fixed-rate terms. 

A 5 year fixed rate mortgage could suit you if you want the peace of mind of knowing what your repayments will be for five years. Bear in mind that you won’t benefit if rates go down during this period though.

Make sure you factor in mortgage set-up fees when you’re comparing the cost of deals rather than just the interest rate. You can do this by looking at the total cost over the deal period.

What happens when the 5 year fixed period is over?

Once you reach the end of a 5 year fixed rate mortgage deal, your mortgage rate and payments are no longer fixed at the same level.

Unless you switch to a new fixed rate, discounted rate or tracker mortgage, you’ll be moved on to your lender's standard variable rate (SVR) mortgage. The interest on this type of mortgage is likely to be higher than the rate you paid during your fixed period. 

As SVRs are rarely the most competitive rates available, it’s a good idea to shop around and remortgage to a new deal when you come to the end of your 5 year term. You could move to a new deal with your existing lender or switch to a different one.

Advantages of a 5 year fixed rate mortgage

By fixing your rate for five years you can be sure that you’ll be able to comfortably afford your mortgage payments for this period as long as your financial situation doesn’t change. You won’t suddenly find your repayments rising to an unmanageable level or that you don’t have as much money left over at the end of the month.

This is particularly helpful if you’re a first-time buyer, when money is often stretched, or you’re on a tight budget.

As you’ll pay a higher interest rate the longer you fix your rate for, you’ll be paying less for your mortgage than if you took out a 10-year fixed rate. It also gives you the option to switch to another mortgage offer sooner without paying early repayment charges (ERCs), which usually apply during the period of the initial deal.

Disadvantages of a 5 year fixed rate mortgage

Five-year fixed rate mortgages generally come with higher interest rates than shorter-term fixed mortgages or the starting rates of variable-rate deals, such as trackers and discounted rates. This is because you’re paying for the security of knowing your mortgage rate won’t change for the next five years.

However, if interest rates go down during the 5 year term of your fixed-rate mortgage, you could end up paying over the odds. If you want to switch to a cheaper deal during the five years, you’ll usually have to pay hefty ERCs. This can more than wipe out any savings you could make by switching.

If you think there’s a good chance that interest rates will fall in the next five years, you may be better off choosing a 2 year fixed rate deal instead.

Alternatives to 5 year fixed rate mortgages

2-year fixed rate

With a 2 year fixed rate mortgage, your rate will stay the same for two years. It’s likely to be lower than with a 5 year fixed rate but you’ll have certainty about what your monthly repayments will be for a shorter period.

The advantage of a shorter-term fix is that if rates go down during the deal period you’ll be able to benefit from this by switching to a new deal without paying ERCs sooner.

10-year fixed rate

If you want the peace of mind of knowing what your repayments will be for as long as possible, a 10-year fixed rate mortgage could suit you. Your rate will be higher compared to a 5 year fixed deal but if rates go up your repayments won’t.

The downsides are that you won’t benefit if rates drop and you’ll have to wait 10 years before you can switch to a new deal without paying ERCs.

Tracker mortgage

Tracker mortgages track another rate – usually the Bank of England base rate – so move up or down with it. 

They usually track the base rate by a certain amount above it. For example, your rate could track at 1% above the base rate so if the base rate is 1.25% you’ll pay 2.25%. If the base rate were to rise to 1.5% your rate would then go up to 2.5%.

Discount mortgage

This is another type of variable-rate mortgage where your rate could go up or down during the initial deal period. You get a discount from the lender’s standard variable rate (SVR) for the period of the deal so your rate will go up or down whenever that does.

As with fixed-rate and tracker mortgages, you’ll pay ERCs to switch during the initial deal period, which could be two or five years.

Claire Flynn - Senior Mortgages Editor at Uswitch
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Five-year fixed rate mortgage deals are some of the longer deals available in the current mortgage market, with most lenders offering a product or two. They have become more popular and less expensive than they once were in comparison to two and three year alternatives.”

Claire Flynn

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