Choosing the right mortgage product term is essential – 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.
When choosing the right mortgage product for you, there are many different factors to consider. These include current market conditions, your property investment plans, and your financial situation. With so many rate options to choose from, it’s essential to work with an expert broker to help you make the most informed property investment decisions. To get you started, we’ve put together a small guide to help you decide between a two-year and five-year term.
Two-year fixed buy to let mortgages
Benefits of two-year fixes
The main benefit of choosing a two-year product is 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.
In typical market conditions, you may also find that rates on two-year products are more competitive. Similarly, early repayment charges (ERCs) are usually more affordable on these products, should you need to end the term early.
Drawbacks of two-year fixes
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’ll likely pay the lender and legal fees with every new mortgage product you lock on to, so you’ll need to consider the additional cost of these fees.
Five-year fixed buy to let mortgages
Benefits of five-year fixes
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.
Drawbacks of five-year fixes
On the other hand, a drawback of choosing a five-year product is that they typically have higher interest rates, which can make them more expensive than two-year fixes.
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 £1,200 per calendar month, and you were looking to purchase in your own name.
On an average two-year product, you could borrow approximately £210,000. On the other hand, for a five-year term, you could borrow around £240,000.*
This stress testing can make a five-year product a more viable option, especially if you’re just setting out on your 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 alone 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. We can offer you guidance based on your personal journey, and 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 are for illustrative purposes only and subject to the borrower’s individual circumstances.
