Beware of the 2 year itch

If you’re moving home and about to apply for a mortgage then it’s fair to say that you are not a complete novice regarding how a mortgage works.

Two year mortgage deals are always the cheapest.

When you work out your monthly mortgage cost on a two year product, it will always look like a more attractive and enticing option as the monthly payments are lower. But just because something is cheaper does not necessarily follow that it’s the best deal. Best buy tables are a good indication of the cost of borrowing, but the truth of the matter is that they are a gimmick because the lowest rate might not be suitable for your needs and requirements. Secondly, as a result of the new mortgage rules, lender’s criteria might completely rule you out from accessing the product.

Without doubt there is a place for two year deals, but before you sign on the dotted line, ask yourself where you think the Bank of England Base rate will be in two years’ time. It’s been at an all time low of 0.5% since March 2009. Thinking about where interest rates will be in the future should be at the heart of deciding on your next mortgage product.

What are the implications of a rate rise and how could this affect your monthly budget? Do you have sufficient savings that you can easily access to tide you over?

If you take a two year deal because it’s the “best deal,” then what happens if rates increase during the two year period? You’ve now committed yourself for two years and by the time you come to the end of the product, you’re entering into a higher rate world. The five year fixed rates are at an all time low, e.g., at 60% LTV, there are five year fixed rates at 2.39% and two year fixed rates at 1.49%. On a mortgage of £200,000 over 20 years, £1049 and £965 respectively, a difference of £84.

You do have the option of remortgaging, but you will have to pay an early redemption charge which can be as high as 3%. That’s a £6000 fee you have to fork out because you took the myopic view. Yes, I know this is why we ask you to seek independent mortgage advice. And you should continue to seek advice, but at the meeting you will be required to contribute to the discussion and share your opinions.

Your mortgage expert ascertains your short to long term objectives, views on the economy and interest rates, and based on this fruitful discussion, sources the appropriate mortgage product that meets your requirements. I am not saying you have to be an economist and be able to predict where base rates will be in 2016/2017. No! If you had a mortgage for the last two years or more, what will be the impact on your monthly budget and lifestyle if rates were to increase?

The impact of base rates should be at the forefront of your decision making process when deciding on your next mortgage deal, as opposed to requesting the cheapest two year deal. If you’re deemed responsible enough to maintain payment of a mortgage for 25 years, then you are wise enough to at least consider the impact of base rates on mortgage product selection.

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

The Financial Conduct Authority does not regulate most types of buy to let mortgages, bridging loans and commercial loans.