Homeowner Recounts Mortgage Decision Amidst Shifting Interest Rates

It has been nearly two years since Helen Crane and her partner purchased their first home, a milestone that prompted Crane, a money journalist, to reflect on the mortgage decision they made. In the summer of 2024, they opted for a five-year fixed mortgage, a choice that went against prevailing advice and market trends at the time.

At that point, inflation was decreasing from its peak during the cost-of-living crisis. While the Bank of England had not yet begun cutting interest rates, such moves were widely anticipated. Consequently, two-year deals were more popular, despite being more expensive. Crane's financially savvy friend and their mortgage broker both advised opting for a shorter term, with the broker noting that homeowners remortgaging more frequently can lead to additional fees for brokers. However, Crane was swayed towards the five-year fix by the prospect of saving approximately £100 per month. Coupled with a substantial deposit, this immediate saving seemed advantageous, especially as she disliked the idea of paying hefty arrangement fees, which often exceeded £1,500, again in a short period.

They ultimately secured a five-year fix at 4.8 percent. Just weeks later, in August 2024, the Bank of England reduced the base rate, and mortgage rates began to fall. This development led Crane to experience "rate regret," as she calculated that a slightly later purchase could have resulted in monthly savings of £50 to £80, and eventually over £100. The prospect of these savings made her stop recalculating.

Now, two years later, Crane reports that the mortgage gods have been kind. Current checks on mortgage comparison tools indicate that the cheapest two-year fix available today, on the same terms, would be 5.19 percent. If her mortgage balance remained constant, this would mean paying £103 more per month. The cheapest five-year fix would be 5.26 percent.

Crane emphasizes that her experience was largely due to luck, acknowledging that predicting interest rates and global events like pandemics or international conflicts is impossible. She points to homeowners who secured mortgages at 1 percent in 2021 and 2022 and are now facing remortgaging to rates around 5 percent, a situation many did not foresee.

Crane suggests that the current market may be entering an era of stable mortgage rates, minimizing the kind of payment shocks experienced by those rolling off ultra-low fixed deals. When choosing between a two-year and a five-year fix, she advises considering three key questions:

What does it cost? Beyond the headline rate, arrangement fees are crucial. A fee of nearly £2,000 can significantly impact the total cost, especially if added to the mortgage balance and incurring interest over time. Currently, the difference between two and five-year fixes is minimal, with rates around 5.91 percent and 5.94 percent respectively, according to Moneyfacts. However, the frequency of paying arrangement fees on shorter deals adds up.

Will I move house soon? Some mortgages can be transferred to a new property, but this is not always feasible, particularly when changing the size of the property. Early repayment charges for breaking a five-year fix early, typically between 1 percent and 5 percent of the mortgage amount, can cost thousands. If future housing plans are uncertain, a shorter-term fix might be prudent.

Can I be bothered? The effort involved in remortgaging should not be underestimated. On a two-year fix, one must start exploring options as early as 18 months into the term to secure the best deal. Forgetting to remortgage on time can result in being placed on a lender's standard variable rate, which can be as high as 7 percent. If the monthly payment difference between fixed terms is not substantial, a five-year fix can offer peace of mind and reduce the administrative burden.