Homeowners are being urged to lock into a five-year fixed deal before mortgage rates begin to rise.
It is expected that interest rates will start climbing before the end of the year, following a number of hints from the Bank of England that the base rate may soon have to go up.
City economists say the cost of home loans could rise by as much as 1.5 percentage points by 2016 — adding around £100 a month to a typical £150,000 deal.
Advice: Homeowners are being urged to lock into a five-year fixed deal before mortgage rates begin to rise
Two-year fixed mortgage deals are still significantly cheaper than those that protect your rate for five years — but if you opt for the shorter fixed term, you risk having to find another new loan while rates are still climbing.
The lowest five-year rate is at 2.94 per cent (google search the top ten 5 year fixed rates)
But opting for a slightly more expensive five-year deal now will protect you against any further rise in rates for an extra three years.
David Hollingworth, of mortgage broker London & Country, says: ‘More borrowers are beginning to choose five-year deals over cheaper two and three-year rates.
‘The shorter term deals look cheaper, but there are still some very competitive five-year deals around — and you may do well to lock into one of these before rates start edging up.’
You need to move quickly, though, as five-year rates are climbing. The average five-year fixed rate a year ago was 3.86 per cent.
Today, according to financial data provider Moneyfacts, it’s 4.2 per cent. There are still some five years fixes below 3 per cent, but it is only a matter of time before these are pulled.
Borrowers who are likely to move home within the next five years should check before locking in for this length of time because your lender may not allow you to transfer your mortgage to your new home.
This means you could end up forking out hefty early repayment charges to get out of your deal early.
If you have a smaller deposit, you may also prefer to take a lower two-year rate and aim to increase the equity in your home before locking in for longer.
If you drive down your balance and house prices improve in the next couple of years, you could benefit from a cheaper rate by having a bigger deposit.
Alternatively, you could opt for a three-year deal. The most competitive three-year fixed mortgage on offer is with Nationwide. Borrowers with a 40 per cent deposit can get a 2.49 per cent rate.
On a £150,000 mortgage taken over 25 years, monthly repayments work out at £670.
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