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Three-year fixed-rate mortgages rising in number: should you get one?

How to get the best fixed-rate mortgage for you

Amidst the uncertainty created by Brexit, you might be tempted to take out a fixed-rate mortgage deal to lock in your interest rate.

While two and five-year deals tend to be the most popular options, the number of three-year fixed-rate mortgages is steadily increasing.

These mortgages offer lengthier certainty than a two-year deal without the early repayment gripes that can come with a five-year deal – but is it still possible to get a good rate?

Which? has analysed the market to see how three-year deals stack up.

  • Whether you’re buying your first home or remortgage, you can get expert advice on the best deal for you by calling Which? Mortgage Advisers on 0800 197 8461, or fill out the form at the bottom of the article for a free call back.

How many three-year deals are available?

There are currently 782 three-year mortgage deals available, Which? analysis of mortgage deals from all lenders shows.

This accounts for nearly 14% of all 5,685 mortgage products.

Deals of this type appear to be increasingly common. In January 2018, just 692 three-year mortgage deals were available, representing 13% of the market.


Best three-year mortgages

The average rate across three-year deals is currently 2.71%, but it’s possible to find a much cheaper deal if you have a large enough deposit.

The lowest-rate three-year mortgage on the market is from Coventry Building Society, with a 1.65% initial rate (4.1% APRC), according to Moneyfacts data. However, you’ll need a 35% deposit to qualify.

If you have a 25% deposit, Coventry Building Society also has a 75% LTV mortgage, which offers an initial rate of 1.69% (4.1% APRC).

And Coventry Building Society also offers the best deal if you have a 10% deposit – with a 2.09% initial rate (4.2% APRC). All of its mortgages come with £999 arrangement fees.

Lastly, for those with 5% deposits, Saffron Building Society offers a three-year fixed-term mortgage at 3.07% (4.3% APRC), with no additional product fees. While this is well above the average, it’s common for low-deposit deals to be the most expensive.

LTV Provider Initial rate APRC Fees
65% Coventry Building Society 1.65% 4.1% £999
75% Coventry Building Society 1.69% 4.1% £999
90% Coventry Building Society 2.09% 4.2% £999
95% Saffron Building Society 3.07% 4.3% £0

Source: Moneyfacts. Correct 8 January 2019.

Three-year mortgages versus two and five-year mortgages

This month’s average rate for three-year mortgages is 2.71%: more than the two-year average of 2.52%, but less than the five-year average of 2.94%.

Rates for all mortgage terms have been rising over the past year, thanks in part to the base rate rise in August 2018, and we’ve previously found that increases are most noticeable in the two-year market.

But there are still some deals to be had, and it’s worth shopping around to find the best deal for you.

Best two-year mortgages

You can take out a two-year fixed-rate mortgage from Leeds Building Society with an initial rate of 1.39% (4.8% APRC) at 65% LTV.

This is significantly lower than the best rate offered on a three-year deal at this LTV, and this holds true for other deposit sizes as well.

The table below shows the best two-year deals based on different LTVs.

LTV Provider Initial rate APRC Fees
65% Leeds Building Society 1.39% 4.8% £1,999
75% Halifax 1.48% 3.9% £1,495
90% HSBC 1.79% 3.9% £999
95% Hanley Economic Building Society 2.69% 5.1% £0

Source: Moneyfacts. Correct 8 January 2019.

Best five-year mortgages

As for five-year mortgages, Skipton Building Society offers an initial rate of just 1.78% (3.7% APRC) at a 60% LTV.

Generally, you’d expect a longer-term fix to be more expensive, but that isn’t necessarily always the case – a five-year mortage at a 95% LTV is actually cheaper than the best rate on a three-year deal. This means first-time buyers with smaller deposits may benefit from opting for a longer-term fix.

You can see the best deals by LTV for five-year fixed-rate deals below.

LTV Provider Initial rate APRC Fees
60% Skipton Building Society 1.78% 3.7% £1,995
75% Atom Bank 1.89% 4% £1,200
90% Coventry Building Society 2.25% 3.9% £999
95% Cumberland Building Society 2.66% 4% £199

Source: Moneyfacts. Correct 8 January 2019.

You can compare hundreds of mortgages with Which? Money Compare.

Should I get a three-year mortgage?

If you’re not convinced by two-year and five-year mortgage options, a three-year fix could be a good compromise.

Locking in to a fixed rate for longer than two years can protect you from future rate rises, which the Bank of England has signalled may be on the horizon.

At the same time, fixing for three years rather than five years allows for more flexibility if you plan to sell the home or remortgage.

If you’re considering moving house or making a significant lifestyle change in the near future, a longer-term fix might not be right for you. This is because lenders tend to charge significant fees – known as early-repayment charges (ERCs) – if you want to leave a fixed-rate deal early.

How do early repayment charges compare?

The ERCs charged by lenders vary. As an example, Atom Bank’s five-year mortgage has the following ERCs:

  • year 1: 5% of the outstanding balance
  • year 2: 4%
  • years 3-5: 3%

However, some of the top three-year mortgages have ERCs, too. The Halifax mortgage has a fee structure as below:

  • year 1: 2% of the original loan
  • year 2: 1.75%
  • year 3: 1%

The fees often aren’t as steep as five-year mortgages, but it’s still something you should bear in mind.

If you think you’re likely to want to move home before the three-year term is up, it may be best to opt for a two-year deal – or a more flexible tracker or discount mortgage.

Speak to a mortgage broker about your options

Choosing a mortgage can be a complex and confusing decision, but a professional mortgage broker can help you work out which deal best suits your circumstances.

For friendly and impartial advice, call Which? Mortgage Advisers on 0800 197 8461 or fill in the form below for a free callback.

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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