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2-Year Fixed Rate Mortgage

Taking out a fixed rate mortgage can offer borrowers peace of mind, as the interest rate stays the same for an agreed period.

Read on to find out how they work, as well as the pros and cons of taking out this kind of mortgage.

What is a fixed rate mortgage?

A two-year fixed rate mortgage is a mortgage where your payments are guaranteed to be the same every month, for two years.

When taking out a mortgage, the loan will be divided into two parts, capital and interest. Capital is the bulk of the loan, used to buy your home and the interest is the amount the lender charges for loaning you the money. Interest charged over a fixed period remains the same with this mortgage type. Your lender will also have a standard variable rate, which moves in-line with the Bank of England base interest rate. This may not affect those on fixed rate mortgage deals, until the set payment period ends.

Affordability is the key point to consider when taking out any kind of fixed-rate mortgage plan. Borrowers need to ask themselves if they can afford to pay the same amount every month, despite any unexpected changes to their household budget?

Am I Eligible for a Fixed Rate Mortgage?

• Fixed Rate mortgages are available to those 18 and over, in the vast majority of instances. Some lenders may impose an upper limit in age for their approved mortgage applicants.
• You will need to pass your lender’s individual credit check. For this, they will use your credit score, which you can also check online via a credit referencing agency. Our Guide to Improving your Credit Rating tells you more about how this score is calculated.
• Your income will also be assessed by the mortgage provider. You will need a stable and high enough income to make your monthly mortgage repayments.
• You will need some savings to make up a deposit for your home purchase. Very few lenders will loan you 100% of the funds to buy a property.
• You will need to have rights to live and work in the United Kingdom.

How is a Fixed Rate Mortgage Repaid?

Lenders offer 2-year fixed rate deals as a means of incentivising new borrowers to take up a mortgage with them. When applying however, you are agreeing to pay off the capital and interest within 25 years (although some mortgages can be extended to 30 years). The two years, refers only to the rate you pay for that set length of time. When the two years is up, you may be automatically switched to the provider’s standard variable rate, which can rise and fall intermittently.

At the end of the two years, you may decide to switch deals with the same lender, or choose to remortgage with another bank or building society. Exiting the fixed-rate deal early may result in you having to pay a few months’ worth of interest payments as a penalty. You may also have to pay to take out a new mortgage product. Find out more about the cost of taking out a mortgage in our Guide for First Time Mortgage Applicants.

Let’s Look at an Example;

Jack and Kelly are first time buyers looking to get a home together. They have scrimped and saved for a long time and have a £20,000 deposit to buy a £200,000 property with a 90% Loan to Value mortgage. They have found a two-year fixed rate deal of 2.5%, however there are set-up costs. Jack found an alternate 2-year fixed rate mortgage for 2.99% interest, with no up-front fees. Jack and Kelly have very little spare cash to cover the cost of moving, so opt for the mortgage with the slightly higher interest rate. As they are choosing to fix for a short period, they will look to remortgage in two years.  

What are the Benefits of a Fixed Rate Mortgage?

• Peace of Mind – For the duration of the fixed rate period, you will know exactly how much your mortgage will cost you, per month. This offers surety to those who need to plan their household budgets carefully.
• Low Interest Rate – If you have a good credit score, and more than 30% deposit, you may be successful in applying for a fixed rate mortgage deal with a low interest rate.  Two years is a short period for you and your lender, therefore some lenders are in the position to offer highly competitive deals on rates of interest. 
• Portability – Many fixed rate mortgages allow you to switch the mortgage to a new property, should you decide to move. This is of course subject to the individual lender’s criteria for portability. 

 What are the Pitfalls of a Fixed Rate Mortgage?

• Cheaper Deals Available – With other mortgage types, such as tracker or capped, when interest rates fall with the Bank of England base rate, your mortgage payments also go down. By taking out a fixed rate mortgage, you may not benefit from these interest rate falls.
• Early Repayment Charges – Should you wish to exit your fixed rate deal early; it is very likely that you will have to pay a penalty. For those on a short, two-year fix, exiting your deal early could be very costly and you would still need to pay to set up a new mortgage.
• Arrangement Fees Often Higher – Security often comes at a price when it comes to fixed rate mortgages. The arrangement fees may be higher than other mortgage types, in some cases.
• Stung by SVR – Check your mortgage contract carefully when taking out a 2-year fixed rate mortgage, as it is very likely that you will be switched to your lender’s Standard Variable Interest Rate on a certain date. If you are a few months away from the end of your two years, be on the lookout for a new deal, as the SVR rate may be more than you are used to paying per month for your mortgage.

What are the Alternatives to Fixed Rate Mortgages?

• Tracker Mortgages – These mortgages track the base rate set by the Bank of England and charge variable interest. In times when interest rates are low, your mortgage payments also fall. However, if the Bank of England base rate were to suddenly rise, these mortgage holders will be charged more.
• Capped Mortgages – This is where you set an upper limit (or ‘cap’) on the amount of interest you pay per month. If there is a fall in interest rates, these customers will benefit from lower mortgage repayments.

Mortgage advisors are on-hand to answer your questions and offer you a free, no-obligation quote. Get in touch today.