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Whether you’re buying a home or remortgaging, one of the biggest decisions you’ll face is how long to fix your mortgage rate.
Two-year and five-year fixed-rate deals are by far the most common types of mortgage on the market. But where you once would have had to pay more to lock in a rate for longer, the opposite is now true.
Read on to learn about how mortgage rates affect your monthly repayments, and for advice on which mortgage term to choose.
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When shopping around for a mortgage, the rates you’ll be eligible for depend on things you can affect - such as your deposit and your credit history - and things you can’t - such as what’s happening in the wider economy.
The average rate on a two-year fix is currently 6.02%. This is 0.39 percentage points higher than the average five-year rate of 5.63%, according to data from Moneyfacts.
This is notable because for much of the past decade it’s been the other way around.
Five-year fixes have historically been more expensive, but that changed in October 2022, when rates began to rocket after the government’s ill-fated mini-budget.
This saw borrowers rush to secure longer-term fixes to protect themselves against rising prices.
Average rates give us an indication of what’s happening in the market, but how much you’ll need to pay each month is largely based on your loan-to-value - the amount of money you’re borrowing compared to the value of the property you’re buying.
For example, if you’re taking out a two-year fix at 60% loan-to-value (with a 40% deposit), the cheapest rate currently available is 4.94%. At 95% loan-to-value (5% deposit), however, the lowest rate is 5.69%.
Using data from Moneyfacts, we’ve crunched the numbers to work out the difference in monthly repayments between two-year and five-year deals at four different loan-to-value levels.
As you can see, two-year fixes currently cost between £50 and £60 more per month.
| Loan-to-value | Monthly payment (two-year fix) | Monthly payment (five-year fix) | Difference (£) |
| 60% | £1,015 | £964 | £51 |
| 75% | £1,268 | £1,217 | £51 |
| 90% | £1,583 | £1,523 | £60 |
| 95% | £1,729 | £1,671 | £58 |
Note: These calculations are based on buying a property for the average UK house price of £291,000, and taking out the cheapest mortgage available in each loan-to-value bracket, over a 25-year term.
With inflation now cooling, all eyes will be on the Bank of England’s base rate announcement next Thursday.
It appears likely that the base rate will remain unchanged, and some experts believe it won’t start to fall until mid-2024.
This means that any prospect of a dramatic drop in mortgage rates is highly unlikely in the short term.
That said, rates are currently falling slightly, with some of the biggest lenders cutting their prices over the last couple of months.
When choosing a mortgage term, you’re gambling on what will happen to the market over the next few years.
So if you lock in a five-year fix at 5% now and in two years mortgage rates have dropped to 3%, you’ll be feeling hard done by. But if they’ve risen to 7%, you’ll be happy with your decision.
The current market sentiment suggests rates will fall over the next couple of years, which might sway you towards a shorter fix.
However, the truth is nobody knows definitively, and - as we saw in late 2022 - things can change overnight.
With this in mind, you might wish to focus more on your own circumstances when deciding on a mortgage term. Follow these tips:
Most mortgages come with early repayment charges (ERCs), which you’ll have to pay if you settle your mortgage during the fixed term. These fees can run to thousands of pounds.
Many lenders will allow you to 'port' your mortgage to a new home, but there’s a good chance that a deal suitable for one property won’t be the best option for a different one.
Taking this into account, if you think you might want to move in the next five years, consider a shorter fixed term to give you greater flexibility.
Some people pride themselves in being on top of their utility, car insurance and mortgage bills, ready to switch to the best deal at the earliest opportunity.
Others, however, aren’t so confident or aren’t interested in spending time shopping around.
If you take out a two-year fix, you can start shopping around for a new deal after about 18 months, whereas if you take out a five-year fix, you’ll be able to sit on your rate for much longer.
If you’re more risk-averse and don’t want to chance the markets, you may be more comfortable knowing your rate and monthly payments are set in stone for five years.
There are thousands of different mortgage deals out there, and it can be hard to get your head around exactly which is best for you.
If you’re unsure about how long to fix for, it’s worth taking expert advice from a mortgage broker on your options.
A good broker will be able to guide you through the decision-making process and apply for a deal on your behalf.
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