Five year fixed-rate mortgages have become increasingly good value for homebuyers, but high early-repayment charges could make you significantly up front.
With the threat of further rises staying with you of England base rate, uncertainty around Brexit along with a raft of recent deals visiting the market, an increasing number of homebuyers and those seeking to remortgage are tying themselves into five-year fixed-rate deals.
But while these headline-grabbing offers may appear cheap at first glance, you could face penalties of tens of thousands of pounds if you want to move house during the five-year term.
Here, we take a look at the popularity of five-year fixes and give you the lowdown how early-repayment charges (ERCs) focus on mortgages.
Five-year deals increasingly popular
For quite a long time, two-year fixes were homebuyers’ amount of choice, but lenders are now reporting more consumers want long term deals to safeguard them against rate increases.
Santander says demand for five-year fixes has hit its highest level in a decade, while Yorkshire Building Society reports a 13% rise in the number of people applying for these deals because the Bank of England hiked the bottom rate in August.
Our research shows the quantity of five-year deals provided by lenders has risen by 3.3% since the base rate change, from 1,979 to 2,044, based on data from Moneyfacts.
This increase outstrips the 2.5% rise in two-year deals, though these items do still possess the largest market share, with 2,330 now available.
Price gap narrows on fixed-rate products
As a general rule, a longer-term fixed interest rate have a higher interest rate than the usual shorter-term deal, as you pay more for additional security.
But with more deals come better rates, and the average initial rate on the five-year method is now within half a percent from the equivalent for two-year deals.
Research published by Moneyfacts in June demonstrated that the gap in cost between two and five-year products had reached its minimum in nearly 5 years.
June 2022 | June 2022 | June 2022 | |
Two-year average rate | 2.57% | 2.3% | 2.52% |
Five-year average rate | 3.17% | 2.86% | 2.92% |
Difference | 0.6% | 0.56% | 0.4% |
Source: Moneyfacts, June 2022
ERCs on 5 year mortgages
All of this might sound just like a case for fixing your mortgage for extended, however, you must only consider carrying this out if you won’t be relocating for five years.
That’s because longer-term fixes often levy early-repayment charges (ERCs), which you’ll be asked to pay if you want to remove the mortgage within the fixed term.
ERC policies vary, however, many lenders charges you you 5% from the overall loan if you sell up at any time during the five year term – an amount that could equal to thousands.
Many of the largest banks will instead ask you for ERCs on a sliding scale, starting at 5% and then reducing each year over the course of the term.
A limited number, meanwhile, offer handles no ERCs whatsoever, if you will need to pay a greater interest rate.
Being susceptible to ERCs doesn’t always mean you won’t have the ability to repay your mortgage faster, however, as some lenders will allow you to overpay with a set amount every year (for example a more 10%) without incurring charges.
Do the cheapest mortgages have ERCs?
The table below shows the least expensive 5 year fixed-rate deals (by initial rate) now available at 75% loan-to-value (LTV).
As you can observe, each lender charges ERCs of 5% within the first year, which in turn gradually reduce to 1% by year five.
Lender | Initial rate | SVR | APRC | Max LTV | Fees | ERCs |
HSBC | 1.94% | 4.19% | 3.5% | 75% | lb999 | Reduces every year: 5%,4%,3%,2%,1% |
NatWest | 1.94% | 4.24% | 3.5% | 75% | lb995 | Reduces every year: 5%,4%,3%,2%,1% |
Sainsbury’s Bank | 1.94% | 4.49% | 3.7% | 75% | lb995 | Reduces each year: 5%,4%,3%,2%,1% |
Source: Which? Money Compare, accessed 12 September 2022
Five-year deals with no ERCs
Some lenders offer two-year fixed or tracker mortgages without ERCs. But Coventry Building Society is currently the only lender offering an ERC-free five-year deal.
You’ll still need to pay a lb125 exit fee if you sell up throughout the fixed period.
The offer question includes a considerably higher initial rate of two.35%, though with an APRC of 3.9%, it remains an aggressive option for those uncertain about fixing for five years.
Lender | Initial rate | SVR | APRC | Max LTV | Fees | ERCs |
Coventry Building Society | 2.35% | 4.74% | 3.9% | 75% | lb499 | None |
Source: Which? Money Compare, accessed 12 September 2022