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Should you get a two-year or five-year fixed-rate mortgage?

Longer fixes are getting cheaper, but beware early repayment charges

The gap in price between two and five-year fixed-rate mortgages has reached its lowest level in almost five years. So how long should you fix your mortgage for?

Five-year deals are now just 0.4% more expensive than two-year products, down from 0.56% a year ago, according to data from Moneyfacts.

This, coupled with the growing possibility of an increase in the Bank of England base rate as early as next month, means that longer-term fixes might be a tempting option for home buyers.

Here, we take a look at trends in the mortgage market and offer advice on whether a longer-term fix is worth considering.

  • If you’re buying a home and need some impartial, expert advice on your mortgage options, call Which? Mortgage Advisers on 0800 2942 849.

Two and five-year mortgage rates

After hitting historic lows last year, two-year fixed-rate mortgage deals have been getting more expensive for some time.

Indeed, based on data from 6 July, two-year deals have increased in price from 2.26% to 2.53% when compared to the same day last year – an increase of 0.27%.

In the same period, five-year mortgages have increased in cost by a much more modest 0.6% year-on-year, making these deals now seem like a more attractive option.

August 2013 June 2016 June 2017 June 2018
Two-year average fixed rate 3.60% 2.57% 2.30% 2.52%
Five-year average fixed rate 3.85% 3.17% 2.86% 2.92%
Difference 0.25% 0.60% 0.56% 0.40%

Charlotte Nelson of Moneyfacts puts this down to both rate pressure and competition. She says: ‘Although the sharp increase in the average two-year fixed rate can be predominately explained by base rate uncertainty, providers also play a part, as they look to shore up their mortgage book ahead of any future rises by the Bank of England.’

‘Specifically, lenders are hoping to entice borrowers onto a longer-term option by keeping their five-year fixed-rate deals competitive, which is why the two-year fixed rates have sped up but the five-year rates haven’t.’


Nearly 2,000 five-year fixes currently available

Two-year deals remain the most popular products offered by lenders, with 2,264 offers available. But there are now also 1,978 five-year products on the market, making up a total of nearly four in 10 fixed-rate mortgage deals.

While there’s been lots of talk about even longer fixes (of up to 10 years) becoming more popular, this isn’t necessarily reflected by product figures, with only 142 10-year products currently available.

Difference in cost of a five-year deal

The Moneyfacts research also looked into the extra cost of repayments on a five-year mortgage in real terms.

The data shows that based on a 25-year repayment mortgage for £200,000, the extra rate security provided by a five-year deal would only cost borrowers £40.87 more a month than an equivalent two-year product.

Watch out for early repayment charges

While the initial rates are attractive, whether you should fix for five years depends on your own personal circumstances – and, of course, the deal on offer.

If you need to pay off a longer term deal early (because you’re moving house or remortgaging, for example), it can be very expensive, as you’ll generally be subject to early repayment charges.

This means that if you want to move house before the end of the fixed period, you’ll have to pay a percentage of the loan as a fee, which can run to many thousands of pounds.

For example, the following early repayment charge structure is in place on the cheapest five-year deal by initial rate (1.80% from Halifax at 60% loan-to-value) currently available.

  • 4.75% until the end of year one
  • 4% until the end of year two
  • 3% until the end of year three
  • 2.5% until the end of year four
  • 1.1% until the end of year five

With this in mind, you should think carefully about your plans for the next five years or so.If moving could be on the cards, it may be wise to consider a shorter-term deal or shop around for a five-year product with no early repayment charges instead.

Where to find mortgage advice

If you need some help understanding your mortgage options, a whole of market mortgage broker can offer you impartial, expert advice on finding the right deal.

For a free call back from an adviser, fill out the form below.

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.

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