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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 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.

  • If you’re buying a home and need some advice on your mortgage options, call Which? Mortgage Advisers on 0800 197 8461.

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

Getting advice on your mortgage options

If you’re buying a home and need some advice on your mortgage options, fill out the form below for a free call back from a mortgage adviser.

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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