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Five-year mortgages are becoming cheaper – but watch out for early-exit fees

Borrowers could face early-repayment charges of up to 5%

Five-year mortgages are becoming cheaper – but watch out for early-exit fees

Five year fixed-rate mortgages are becoming increasingly good value for homebuyers, but high early-repayment charges could leave you significantly out of pocket.

With the threat of further rises in the Bank of England base rate, uncertainty around Brexit and a raft of new deals coming to the market, a growing number of homebuyers and those looking to remortgage are tying themselves into five-year fixed-rate deals.

But while these headline-grabbing offers might seem cheap on the surface, you could face penalties of tens of thousands of pounds if you need 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 on how early-repayment charges (ERCs) work on mortgages.


Five-year deals becoming more popular

For a long time, two-year fixes were homebuyers’ deal of choice, but lenders are now reporting that more consumers want longer term deals to protect 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% increase in the number of people applying for these deals since the Bank of England hiked the base rate in August.

Our research shows that the number of five-year deals offered by lenders has risen by 3.3% since the base rate change, from 1,979 to 2,044, according to data from Moneyfacts.

This increase outstrips the 2.5% rise in two-year deals, though these products do still have the largest market share, with 2,330 currently available.

Price gap narrows on fixed-rate products

As a general rule, a longer-term fixed rate will have a higher interest rate than a shorter-term deal, as you pay more for additional security.

But with more deals come better rates, and the average initial rate on a five-year product is now well within half a percent of the equivalent for two-year deals.

Research published by Moneyfacts in June showed that the gap in cost between two and five-year products had reached its lowest level in nearly five years.

June 2016 June 2017 June 2018
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 2018

ERCs on five year mortgages

All of this might sound like a case for fixing your mortgage for longer, but you should only consider doing this if you won’t be moving house for five years.

That’s because longer-term fixes often levy early-repayment charges (ERCs), which you’ll be required to pay if you want to pay off the mortgage within the fixed term.

ERC policies vary, but some lenders will charge you 5% of the overall loan if you sell up at any time during the five year term – a sum that could add up to tens of thousands.

Many of the largest banks will instead charge you ERCs on a sliding scale, starting at 5% and then reducing each year over the course of the term.

A select few, meanwhile, offer deals with no ERCs at all, though you will need to pay a higher interest rate.

Being subject to ERCs doesn’t always mean you won’t be able to pay off your mortgage faster, however, as some lenders will allow you to overpay by a set amount each year (for example a maximum of 10%) without incurring charges.

Do the cheapest mortgages have ERCs?

The table below shows the cheapest five year fixed-rate deals (by initial rate) currently available at 75% loan-to-value (LTV).

As you can see, each lender charges ERCs of 5% in the first year, which then gradually reduce to 1% by year five.

Lender Initial rate SVR APRC Max LTV Fees ERCs
HSBC 1.94% 4.19% 3.5% 75% £999 Reduces each year: 5%,4%,3%,2%,1%
NatWest 1.94% 4.24% 3.5% 75% £995 Reduces each year: 5%,4%,3%,2%,1%
Sainsbury’s Bank 1.94% 4.49% 3.7% 75% £995 Reduces each year: 5%,4%,3%,2%,1%
Source: Which? Money Compare, accessed 12 September 2018

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 £125 exit fee if you sell up during the fixed period.

The deal in question has a considerably higher initial rate of 2.35%, though with an APRC of 3.9%, it remains a competitive 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% £499 None
Source: Which? Money Compare, accessed 12 September 2018
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