Fixed-rate mortgages are now cheaper than at any point in the past 12 months – but some borrowers stand to benefit more than others.
The average interest rate on a two-year fixed-rate mortgage dropped to 2.2081% last week. This is the lowest level recorded in the last 12 months and significantly down on last September’s average of 2.4372%, according to data from Moneyfacts.
But while this sounds like exciting news for home buyers, the headline rate doesn’t tell the full story. Which? explores the types of deals that are offering the best bargains.
- Fixed-rate mortgages are a popular choice, but their are many options on the market. For impartial advice about finding the right mortgage, call Which? Mortgage Advisers on 0808 252 7987.
Do changes in mortgage rates matter?
It might seem like people are getting over-excited about a fifth of a percent – but every little helps. Even a small drop or rise in the mortgage rate can make a big difference in your repayments, especially over the long-term.
Take the example of a 25-year loan for £225,000 – if you were to take out a two-year fixed rate mortgage at this September’s level (2.21%), you’ll have paid off £404 more once the fixed period ended than if you took it out last September (2.44%).
Is this good news for buyers with small deposits?
Not necessarily. While mortgage rates might seem low at the moment, getting the best deal will depend on how much you’re borrowing. This is known as the loan-to-value ratio, which shows the percentage of the property price you’re borrowing compared to the deposit you’re putting down.
As the charts below show, the vast majority of deals – and thus the best rates – are available at loan-to-value ratios between 71% and 90%.
Our research shows borrowers with smaller deposits aren’t reaping the rewards of ‘historically’ low rates to the same degree as those with a deposit of 10% or greater. Interestingly, buyers with a deposit of 40% or more face the second highest interest rates – possibly because less deals are on offer and the market is less competitive.
Are some terms more popular than others?
Aside from the amount you borrow, your deal will also depend on how long you’re prepared to fix your rate.
While the number of two-year deals on offer has increased by 8.6% in the last year, the biggest news has come in the five-year market.
The number of five-year deals has increased by 27.7% increase in just 12 months. More borrowers are looking to lock themselves in while the base rate is low, and lenders are taking advantage of increasing demand.
Research from the conveyancing firm LMS shows that over a third (37%) of borrowers remortgaged on to a five-year deal in July this year – the highest proportion on record.
So who is the main beneficiary?
As discussed earlier, the average two-year fixed mortgage rate has dropped by over a fifth of a percent in the last 12 months, meaning there are some great deals out there for home buyers.
In terms of five-year deals, the difference isn’t quite so profound. In the last 12 months the average rate on a five-year fixed-rate mortgage has dropped by 0.13% – from 3.07% to 2.94%.
But whether you prefer the flexibility of a short fix or the comfort of a longer deal, if you’ve got a deposit of more than 10%, fixed-rate mortgages are currently at very favourable levels.
What about three-year fixes?
Three year fixes might seem like the black sheep of the family – with the number of deals on the market dropping slightly from 724 last year to 710 in the last year.
Rates, however, remain healthy – with the average interest rate dropping by 0.16%, from 2.85% to 2.69%.
This means a three-year fix could be worth considering if you’re looking for some security but think you might want to move house in the next five years.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.