Whether you’re buying the first home or remortgaging to get a better deal, you may be wondering how long you should fix your rate for.
Here, we compare two of the most popular types of mortgage – two-year and five-year fixes – and explain the important thing things you’ll have to consider when selecting just how long to lock a rate in for.
How much do fixed-rate mortgages cost?
In yesteryear Twelve months, rates have crept up from the historic lows seen in late 2022 – but fixed-rate mortgages still remain competitive.
Rate rises happen to be particularly noticeable within the two-year market, in which the average price of a mortgage has increased by 0.17% to achieve 2.52%.
This rise has made five-year fixes – which increased on price by just 0.07% in 2022 – more appealing to homebuyers and remortgagers.
Gap narrows between two and five-year deals
With more products visiting the market and rates remaining stable, five-year deals became popular in 2022 – however in truth, the space in cost between two- and five-year deals has been closing for a while now.
As the table below shows, the gap has narrowed by around 0.10% every year within the last four years.
|Average two-year fixed rate
|Average five-year fixed rate
Why have two-year fixes become more expensive?
For quite a long time, two-year fixed-rate mortgages dominated the market, with lenders scrambling to give the best rates, particularly at popular loan-to-value (LTV) levels for example 75% and 80%.
This led to rates hitting historic lows in Autumn 2022. Since then, the financial institution of England base rate has increased from 0.25% to 0.75%, meaning these incredibly low rates have largely disappeared.
With that in your mind, lenders have focused their deals on other markets – for example longer-term fixes of 5 years or even more.
The shift towards longer fixes also reflects changing consumer attitudes. Homebuyers and remortgagers are increasingly seeking to protect their mortgage rate for longer throughout a time of economic and political uncertainty.
Cheapest fixed-rate mortgage deals
While the table above shows the typical rates currently available, the least expensive introductory rates are considerably lower.
Indeed, remortgagers at 75% LTV can also enjoy interest rates well below 2% on two-year and five-year fixed terms, as shown in the charts below.
Whether you can access the very best rates available on the market will depend on your own personal financial circumstances, so it’s worth getting professional advice from an independent large financial company before you apply.
Two-year deals vs five-year deals
So if you undertake a 2 or five-year fix?
Your decision ought to be based on three key factors: your finances, when you intend to move house, as well as your appetite for risk.
|Offers the flexibility to negotiate another deal after 18 months.
|You are only protected from rate rises for two years, therefore if mortgages be expensive for the reason that time, you can struggle to change to a similar deal.
|Even if you’re buying or remortgaging at 90% LTV, you can get an introductory rate below 2%.
|You’ve missed the boat for that very cheapest rates, with prices increasing, you may need to apply soon to secure a good rate.
|With more than 2,000 products available on the market, buyers and remortgagers have plenty of choice.
|You’ll have to be on the ball to avert being forwarded to your lender’s standard variable rate (SVR) after 2 yrs, which will be significantly more expensive.
|Offers rate security for longer – you’ll be protected from the effect of any increases in the Bank of England base rate for half ten years.
|Many of the best deals come with high early repayment charges (ERCs), which can be as much as 5% if you leave the mortgage in the first year. If it’s even a slight possibility that you might need to move within the next five years, consider a shorter-term fix or find a cope with no ERCs.
|Rates are exceptionally good at the moment, with lenders fighting to top the charts.
|Five-year deals are still around 0.4%-0.5% more expensive than equivalent two-year products.
|You’ll have the ability to steer clear of the second large amount of arrangement fees which you may face should you switch deals at the end of a two-year mortgage.
|If home loan rates drop, you’ll be stuck paying the rate you fixed at for 5 years.
Will mortgages stay cheap in 2022?
With uncertainty around Brexit and the way forward for the base rate, it’s hard to say what might happen within the mortgage market in 2022.
There are a couple of key emerging trends to be aware of, however.
First of, lenders are increasingly substituting reduced rates for up-front incentives. With this thought, don’t be amazed to see fee-free and cashback offers continue to evolve in 2022. When comparing mortgages, always look in the full price of deals instead of focusing solely on their initial rates or incentives – and take advice if you’re unsure.
This could also be a good year for people with small deposits. 95% mortgages got cheaper in 2022, with lenders facing pressure to become more dynamic in their offerings, don’t be surprised to determine more deals offering higher income multiples this season.
People looking to remortgage with an outstanding Assistance to Buy equity loan may also see more options seriously towards the market in 2022.