Overall representative example If you borrow £178,000 mortgage over 25 years initially at 4.49% fixed for 60 months reverting to 7.99% variable for term. 60 monthly payments of £988.37 and 240 monthly payments of £1306.89. Total amount payable £373,335.80 includes loan amount, interest of £194,956, valuation fees of £0 and product fees of £0. The overall cost for comparison is 6.7% APRC representative.
After sitting at all-time lows for some time, interest rates are back on the move. So if you’re looking for some stability with your mortgage repayments, you might want to take advantage of low rates and lock into a fixed rate deal. Choosing a 2-year fixed rate mortgage means your monthly repayments won’t change for the duration of the 2-year term, no matter what happens to the base rate. This can protect you from any unexpected monthly repayment increases if rates rise.
Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.
How does a 2-year fixed rate mortgage work?
Banks tend to use movements in the BoE base rate, alongside other economic factors, to determine the rate of interest charged on mortgages and other credit products. The base rate is voted on by the Monetary Policy Committee (MPC) 8 times a year, although the rate won’t change each time.
Variable rate mortgages, particularly tracker mortgages, tend to closely track the base rate. So if the base rate goes down, so will the mortgage rate. But if the base rate goes up the mortgage rate will also rise and monthly repayments will be higher.
In comparison, a fixed rate mortgage protects borrowers against rising rates. You lock in a rate with your lender and for the duration of that term your rate stays the same.
As the name suggests, a 2-year fixed rate mortgage fixes the interest rate for 2 years. This is one of the most common mortgages offered by UK banks and mortgage lenders.
2-year fixed rate deals can be a good option for first-time buyers. Knowing what your monthly repayments will be for the next 2 years can allow you to budget better, which can be vital when buying your first home. At the same time, you’re not locking in for too long which gives you the flexibility to switch mortgage deals if your circumstances change.
The downside is that fixed rate mortgages tend to be less flexible than variable rate mortgages. They can also have higher rates and higher fees. For example, an early repayment charge may apply should you need to get out of your deal early – although these tend to be lower on 2-year deals compared to longer-term fixed rate mortgages.
What types of 2-year fixed rate mortgages are available?
In the same way as most other mortgages, you can choose from the following types of 2-year fixed rate deals:
Residential mortgages
If you’re buying a home to live in (rather than rent out), you’ll need a residential mortgage. You can choose from a range of fixed rate residential mortgages, including 2-year deals. You’ll usually need at least a 5% deposit, but the more you can put down, the better the rate of interest you’ll secure. You’ll also have access to more competitive deals if you have a good credit score.
Buy-to-let mortgages
If you’re buying a property to rent out to others, you’ll need to take out a buy-to-let mortgage. Again, 2-year fixed rate deals are available. A deposit of between 25% and 40% is usually required with a buy-to-let mortgage and interest rates are often higher compared to residential mortgages.
Repayment mortgages
2-year fixed rate mortgages are usually on a repayment basis. This means that you repay a portion of the capital (the original amount borrowed) and a portion of interest in each monthly repayment. As long as you don’t fall behind on your repayments, your entire loan will be paid off by the end of the mortgage term, typically 25 years.
Interest-only mortgages
Some lenders also offer 2-year fixed rate interest-only deals. These allow you to only pay off a portion of the interest each month which means your monthly repayments will be cheaper. However, at the end of your mortgage term, you will need to repay the original amount borrowed.
Interest-only mortgages are not as common as repayment mortgages and you’ll need to show you have an approved repayment vehicle in place to ensure you can pay off the capital.
How to compare 2-year fixed rate mortgages
A 2-year fixed rate mortgage can be compared in the same way as any other mortgage, keeping in mind the following:
Interest rate. The interest rate will be one of the most important factors to consider – ideally you’ll want to look for the cheapest rate possible as this will determine the size of your monthly mortgage repayments.
Mortgage fees. As well as the interest rate, you should also compare arrangement or booking fees. Some low rate mortgages charge high fees which means it could be cheaper to opt for a mortgage with a slightly higher interest rate but a low (or no) fee.
Overpayment limits. If overpaying on your mortgage might be a possibility, make sure you check whether there are any limits or fees for overpayments. Most lenders will allow you to overpay by up to 10% a year, but after this fees usually apply.
Early repayment charges. Check how much it would cost if you needed to get out of your mortgage deal early. Fees can vary between lenders and depending how close you are to the end of your deal.
Example: Ted and Laura
Ted and Laura are a recently married couple looking to buy their first home. Rather than spending their money on renting, they want to get a small place that will allow them to afford the monthly repayments along with their other expenses.
Ted and Laura opted for a 2-year fixed mortgage.
Here’s why:
Monthly repayments. Having paid a 20% deposit, Ted and Laura want to be judicious with their spending and budget all their expenses. Knowing that their monthly repayments won’t change for at least 2 years allows them to budget with confidence.
Interest rates. By locking in the interest rate for a couple of years, they’ll save money if rates happen to rise during that period.
Term. If they find that a fixed term isn’t working out, they can remortgage to a different mortgage after the 2-year period.
* This is a fictional, but realistic, example.
Pros and cons of a 2-year fixed rate mortgage
Pros
Better for budgeting. 2-year fixed rate mortgages give you the security of knowing exactly what your repayments will be each month for 2 years, without worrying about interest rate rises.
Option to overpay. Many fixed rate mortgages allow you to make extra payments so that you can clear your mortgage more quickly. However, these may be limited to a set percentage of your outstanding balance.
Flexibility to move after 2 years. Even if you decide that fixed rate mortgages aren’t for you or rates are cut significantly, in 2 years you’ll be able to change your rate to a variable rate or a different fixed rate option. This means you aren’t locked in for an extended period of time.
Cons
No benefit if rates drop. If the base rate falls further, your mortgage rate will remain the same, so you won’t benefit from reduced repayments.
Early repayment charges. Fixed rate mortgages usually charge a fee if you leave your deal early – these can be expensive.
Bottom line
If you’re looking for some stability with your mortgage repayments, a 2-year fixed rate mortgage can be well worth considering. Offering the chance to lock in your mortgage rate, a 2-year fixed rate deal allows you to better predict your living expenses for the next 2 years. It also gives you the flexibility of being able to switch to another deal once those 2 years are up.
Frequently asked questions about 2-year fixed rate mortgages
Once your mortgage deal has come to an end, you will usually be automatically switched over to your lender's standard variable rate (SVR). This is typically higher than other rates, so it's best to shop around and look for a more competitive deal to move to.
In most cases, your lender will notify you when your fixed period is coming to an end so you can make a decision, but it's better to set a calendar reminder yourself well before the fixed rate ends so you can decide what you're going to do.
Although it can be more difficult to get a mortgage with bad credit, it is still possible. You can increase your chances of getting accepted by shopping around and talking to a fee-free mortgage broker who can advise you on the best deals to apply for. Be aware you may have to put down a larger deposit to qualify and the interest rate charged is likely to be higher.
In theory, those who are self-employed have access to exactly the same mortgage deals as everyone else – including 2-year fixed rate deals. However, you'll usually need to have been trading for at least 3 years and show you have 2–3 years' worth of accounts.
We show offers we can track - that's not every product on the market...yet. Unless we've said otherwise, products are in no particular order. The terms "best", "top", "cheap" (and variations of these) aren't ratings, though we always explain what's great about a product when we highlight it. This is subject to our terms of use. When you make major financial decisions, consider getting independent financial advice. Always consider your own circumstances when you compare products so you get what's right for you. Most of the data in Finder's comparison tables has the source: Moneyfacts Group PLC. In other cases, Finder has sourced data directly from providers.
Rachel Wait is a freelance journalist and has been writing about personal finance for more than a decade, covering everything from insurance to mortgages. She has written for a range of personal finance websites and national newspapers, including The Observer, The Mail on Sunday, The Sun and the Evening Standard. Rachel is a keen baker in her spare time.
A change in personal circumstances may make it necessary to remove a name from a title deed. Here’s how you can go about it.
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