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Q: I‘m due to re-mortgage my flat by the end of the year and am just weighing up my options. I think a fixed rate mortgage seems like the best way to go. However, I’m struggling to decide between a two- or five-year rate. What should I be considering? 

A: Unfortunately, re-mortgaging is incredibly difficult right now. As you mentioned, interest rates are at an all-time high, and it’s going to be virtually impossible to avoid paying significantly more, whether you are going for a repayment or interest only option.

I agree that given the current interest rates and market instability, a fixed rather than variable mortgage rate is the way to go. Yet you have to weigh up the pros and cons of a two, five, or even ten-year approach.

To start with, the shorter the mortgage term, the less your monthly repayments tend to be, so the two-year option might be helpful if you are on a tight budget or need to save cash in the immediate term. The short-term nature of the two-year option may also make sense if you are likely to be selling up after a couple of years or are expecting a change of circumstances. Furthermore, being locked in for only two years means that you will have the opportunity to re-mortgage sooner and potentially get a better mortgage deal.

However, given the current financial landscape, there’s very little guarantee that a new mortgage rate in two years will be more appealing, and if you do decide to re-mortgage to get a better deal after the fixed term is over, you will likely also incur additional fees.

On the other hand, a five, or even ten-year fixed rate tend to be more expensive, and leaves you with less flexibility to change, should the market bounce back within the next few years. However, what these longer terms do offer is more certainty around your household planning, which is good news for your cashflow management/budgeting. It’s also a bonus if you are in a long term, or forever home, and leaves you without the hassle of worrying about remortgaging for a longer amount of time, which means if rates continue to rise you have more time to wait out the instability.

Like many things, the best rate to go for depends entirely on your circumstances and what you are looking for. Interest rates are increasing fast, and with an impending recession it’s fair to assume that there might be some market instability for some time to come. However, as the last few weeks have truly demonstrated, there are so many factors that can impact markets, and it is impossible to predict where things may be in two, five or ten years.

As always do your research so you have a feel for what’s available, but if you’ve never used one before, now is the perfect time to speak with a mortgage adviser who will be well placed to assess the market as well as your personal circumstances and hopefully secure you the best possible rate.

Good luck!

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