Two- vs Five-Year Mortgages – which is the better investment choice

Choosing the right mortgage is more important than ever – but how do you decide between a two-year or a five-year deal? With benefits and drawbacks to both, here’s what investors need to consider when choosing their next buy to let mortgage product.

The current market has left many landlords and property investors undecided about navigating the ongoing interest rate increases. With rising SWAP rates, Bank of England Base Rate, and the cost-of-living crisis, it’s unlikely we will see much change any time soon. As such, property investors face a choice between fixing in for a short period, and hoping prices have settled in the two years, or fixing for five years to avoid further uncertainty.

Now more than ever, investors hope to cut costs and secure the right mortgage product. To help, we’ve put together a small guide to help you decide which term would better suit your needs.

Two-year fixed buy to let mortgages

The main benefit of choosing a two-year product is that the rates are often more competitive. Following that, you’re only tied in for a short period, so if prices drop or you’re considering selling the property, there’s not too long to wait until you can. Similarly, early repayment charges (ERCs) are typically more affordable on these products, should you need to end the term early.

However, there are also some drawbacks to choosing a two-year term. Changing mortgage products every two years will mean that you have less long-term financial security in budgeting your outgoings, as your repayments will change more frequently than with a five-year product. Similarly, you’re likely to pay lender and legal fees with every new mortgage product you lock on to.

Five-year fixed buy to let mortgages

A five-year product offers much longer financial security and protection from potential interest rate rises, and you have less frequent mortgage-associated fees and costs to worry about. Locking in for longer gives you the benefit of budgeting your monthly repayments for a more extended period.

On the other hand, a drawback of choosing a five-year product is, typically speaking, they’re the more expensive option. You’ll also have to consider that, should rates reduce during your five-year period, you won’t be able to benefit from the competitive deals available without paying ERCs.

Which product allows you to borrow more?

A five-year product should typically secure you larger borrowing amounts than two-year products due to lender rental-coverage stress testing. For example:

Say a property is valued at £320,000, generating a rental income of £1,300 per calendar month, and you were looking to purchase in your own name.

On an average two-year product, you could borrow approximately £195,000. Whereas, on a five-year term, you could borrow around £250,000.*

This stress testing can make a five-year product a much more viable option, especially for those setting out on the property investment journey.

Things to consider when deciding which product to choose

There are a couple of things to consider when choosing between a two- and five-year product:

• What are your property investment portfolio plans? How long do you plan on keeping the property?

Do you plan to sell one or more of your investment properties in the near future? Your answer may heavily impact your decision, as you will have to consider the ERCs associated with your deal. Likewise, if you think you may need to raise capital from the property for further investment or improvements, consider the time frame of these plans when choosing how long to fix for.

If you intend to keep the property as a long-term investment with few changes to your wider portfolio, as many landlords do, then a longer fixed mortgage may be a better option for you.

• Do you prioritise flexibility or long-term security?

Do you want to ensure you have flexibility with your property in the short-term, or are you more focused on having long-term security of your finances?

Making this decision on your own can be difficult, especially without knowing the full scope of mortgage products you can access. We recommend seeking professional advice from a whole-of-market mortgage broker. Not only can we offer you guidance based on your personal journey, but our expert team can cost up each option, to help you make an informed investment decision. Submit an enquiry here, or call us on 0345 345 6788 to review your options today.

*Figures based on example data for illustrative purposes only and subject to the borrower’s individual circumstances.

7th September 2022