Two-year fixed rates have traditionally been popular with brokers but now expose borrowers to unnecessary risks, Ray Boulger at John Charcol has warned.
With interest rates now unlikely to rise before 2016, following Bank of England governor Mark Carney's inflation report on Wednesday, they offer protection during a period when borrowers are unlikely to need it, Boulger said.
Locking clients into a two-year fix is risky because they will have to pay early redemption repayment charges (ERCs) if they want to remortgage if interest rates start rising
Borrowers who want a fixed rate should be looking for much longer deals of five or even 10 years instead.
Boulger said: “As fixed rates are at similar levels or even cheaper than a tracker or discount, purchasers should take a fixed rate but consider whether it should be for five or 10 years, rather than two or five years.
"A two-year fixed rate only provides protection for a period when it is highly unlikely to be needed but actually exposes the borrower to increased interest rate risk as the early repayment charge (ERC) will make it uneconomic to remortgage before the end of the fixed rate period and thus the risk is that rates will be higher if a new fixed rate is required two years later.
“Some people of course will be keen to avoid being locked into ERCs for very long, which is often a deterrent from taking a 10-year fix, and in that situation a two or three-year fixed rate, or a term tracker with no ERCs, is likely to be a better option."
Boulger said mortgage rates are unlikely to get much cheaper. “For existing homeowners looking to remortgage there is no point in waiting in the hope of lower rates, but also no need to rush if personal circumstances dictate waiting a few months would be preferable."
Rising house prices could help some borrowers get a lower-LTV mortgage, say, by pushing their LTV from 85% to 80%. "This will often reduce the interest rate significantly, resulting in a saving well worth waiting a few months for, if it means much less interest to pay over the next five or 10 years. For example, five-year fixed rates up to 85% LTV start at 3.84%, whereas up to 80% LTV they start at 3.09%,” he said.
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