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9 Jan 2019

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

How to get the best fixed-rate mortgage for you
Row of terraced houses

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.

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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.

LTVProviderInitial rateAPRCFees
65%Coventry Building Society1.65%4.1%£999
75%Coventry Building Society1.69%4.1%£999
90%Coventry Building Society2.09%4.2%£999
95%Saffron Building Society3.07%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.

Two, three and five-year fixed-rate mortgages

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.

LTVProviderInitial rateAPRCFees
65%Leeds Building Society1.39%4.8%£1,999
95%Hanley Economic Building Society2.69%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 mortgage 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.

LTVProviderInitial rateAPRCFees
60%Skipton Building Society1.78%3.7%£1,995
75%Atom Bank1.89%4%£1,200
90%Coventry Building Society2.25%3.9%£999
95%Cumberland Building Society2.66%4%£199

 Source: Moneyfacts. Correct 8 January 2019. 

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.