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12 Jan 2020

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

Discover which banks are offering the cheapest mortgage rates for 2020

Both two and five-year fixed-rate mortgages got cheaper in 2019, meaning there's a whole host of great offers out there for buyers and remortgagers as we enter the new year.

But which type of deal should you choose?

Here, Which? takes a look at the things you'll need to consider when choosing a mortgage term and explains which banks are offering the best rates right now.

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Will we see January sales on mortgages?

Whether you're buying a home or looking to remortgage, January is a good time to secure a great deal, with plenty of choice for borrowers at all levels.

Indeed, data from Moneyfacts shows there are currently 2,537 two-year fixes and 2,437 five-year fixes on the market.

The January mortgage sales are yet to fully kick into gear, but this week we've seen cuts on fixed-rate deals from Barclays and Virgin Money, so don't be surprised if other banks follow suit soon.

The start of the year tends to be most popular with existing homeowners looking to switch to a cheaper deal.

Data from UK Finance shows that nearly 47,000 people remortgaged in January last year - more than any other month in 2019.

What's happening to mortgage rates?

Average rates offer us a guide to which way the market is moving, and right now both two and five-year fixed-rate deals are getting cheaper.

Longer-term fixes have seen the biggest falls over the past 12 months. The average two-year rate fell by 0.08% in 2019, while the average five-year rate dropped by 0.2%.

Why are five-year deals getting cheaper?

2019 was a popular period for five-year deals, with banks cutting rates, and borrowers opting for longer-term security at a time of economic uncertainty around Brexit.

Fierce competition in this market resulted in the average gap in cost between a two and five-year deal dropping to just 0.3%. To put this in context, the gap was 0.42% a year ago and 0.52% in January 2018.

With a Brexit resolution now on the cards, we may see more borrowers opt for riskier short-term fixes, and it seems unlikely that the gap will shorten too much further in 2020.

Cheapest rates on two and five-year fixes

Average rates provide a useful gauge of the market, but you're probably wondering where you can find the cheapest deal.

In the interactive chart below, we've collated the cheapest initial rates on two and five-year fixes at six popular LTV levels.

Right now, the cheapest two-year fix is priced at just 1.14%, and the cheapest five-year deal is at 1.44%. Both are available from Halifax at 60% LTV.

To see the best rates and which banks are offering them, simply hover your cursor over the bars in the chart below.

How long should I fix for?

The best mortgage term for you depends on your personal circumstances and your attitude to risk. Let's take a look at some of the pros and cons of two and five-year deals:

Two-year fix

Two-year fixes are the cheapest deals, with sub-2% rates available right up to 90% loan-to-value.

They also give you the freedom to negotiate a new deal after as little as 18 months, meaning you can always stay on top of your mortgage rate.

On the other hand, you'll need to be proactive to avoid being passed onto your lender's standard variable rate, and you'll only get protection against rising mortgage rates for two years.

Suitable for:Borrowers who want to stay on top of their finances and ensure they're on the best rate, or those considering moving in the near future.

Five-year fix

Five-year fixes are attractively priced and offer rate security for much longer than two-year deals, allowing you to 'set and forget' your mortgage and have control over your long-term payments.

The biggest downside is that they tend to come with high early repayment charges of up to 5%, so you could face a significant penalty if you want to move home during the deal period.

Suitable for:Borrowers wanting long-term rate security who aren't planning on moving home in the medium term.

Other terms

While two and five-year deals make up the vast majority of the market, it's possible to fix for a range of other terms.

Three-year and 10-year deals are the most common alternatives, although there's relatively little competition between lenders (especially at 90% LTV or above), so you might struggle to find a truly attractive rate.

And with Virgin Money having recently launched the first 15-year deal since the financial crisis, it's possible that we could see more niche deals coming to the fore in 2020.

Comparing mortgage deals: five tips

  1. Take note of up-front fees:the cheapest deals sometimes come with up-front fees of more than £1,000. Always look beyond the initial rate at the full cost of the deal.
  2. Don't get carried away with cashback:lenders often look to cashback incentives to lure buyers in, but the benefits can be negligible. Consider cashback a 'nice to have' rather than a deal-breaker.
  3. Get to grips with early repayment charges:the cheapest longer-term fixes usually have high early repayment charges, so consider your future plans before jumping in.
  4. Take advice from a mortgage broker:with thousands of mortgages on the market, it can be helpful to take advice from a specialist broker, who can find the right deal for you.
  5. Consider saving more: as you can see in the chart above, the gap in cost between the cheapest 90% and 95% deals is significant, so consider if you can save until you've got a 10% deposit.

You can get more tips on comparing mortgages in our guide to finding the best mortgage deals.

Best and worst mortgage lenders

Rates are important, but so too is quality of service, especially if something goes wrong.

In June 2019, we conducted the latest version of our annual mortgage customer satisfaction survey, and awarded coveted Which? Recommended Provider status to three lenders.

To find out which ones they are and how your lender shapes up against the competition, check out our guide to the best and worst mortgage lenders.