Higher mortgage rates and living costs have placed significant pressure on many homeowners in recent months, who may be wondering whether now is the time to lock into a deal that lasts for five years or longer.
Currently, interest rates on some five-year fixed-rate mortgages are cheaper than two-year fixed-rates, but homebuyers or those looking to remortgage will need to weigh up how long they are comfortable fixing for. That’s because once you lock into a fixed rate mortgage deal, you usually can’t leave it without having to pay hefty early redemption penalties. This means that if interest rates fall again in the future, there’s a risk you’ll be stuck paying a higher rate.
However, if you aren’t confident that interest rates are going to fall sharply any time soon, you may be happy signing up for a longer term fix and the budgeting certainty this can provide you with.
Previously, when the base rate stood at 0.1%, 10-year fixed mortgage rates were around 2%, compared to less than 1% on two-year and five-year fixed-rate deals. However, following a series of increases in the base rate these rates have risen substantially, and currently, five-year deals are the cheaper option. For example, at the time of writing (March 2024) the best buy rate stood at 4.09% for a five-year fix, and 4.77% on a 10-year fix, compared to 4.57% on a two-year deal.
Historically, borrowers have paid higher rates for the security that longer-term mortgages provide, and shorter-term mortgages have traditionally offered lower rates. So why has this changed and what might it mean for the future?
From a borrower’s perspective, fixing their mortgage rates for a longer period of time can provide valuable peace of mind that their monthly payments won’t change during the fixed period. It also avoids the need to shell out for numerous remortgage costs that they could face if they chose several shorter-term products consecutively instead. Find out more about these in our guide How much does it cost to remortgage?
The motivations of lenders aren’t so different from their customers, with some banks offering cheaper long-term mortgage rates to provide them with certainty that they’ll be able to balance their books in the long term. It also indicates that financial markets are anticipating interest rates likely to fall in the future.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
Teddy Cenaj, mortgages expert at broker Habito, highlights that while the difference between the long-term and short-term rates is shrinking, it’s not something that every borrower will benefit from.
He said: “We have seen the difference between two and five-year fixed-term mortgages reduce quite heavily, with some customers finding it cheaper to get a five-year fixed-term mortgage over a two-year one, but this is generally for mortgages with lower loan to values such as less than 60%.” So while convention seems to be turned on its head for rates at the moment, it’s the borrowers that have a substantial amount of equity in their homes if remortgaging, or buyers with large deposits to put down who will benefit from the best deals.
What does this mean for you?
If you’re looking to get a mortgage for the first time or are planning to remortgage and are looking to fix your rate for five to ten years, then the timing could be perfect as you will benefit from lower rates than two-year deals. However, bear in mind that no-one can accurately predict where rates will be in a few years’ time. So, whether to fix for the long-term is entirely down to your personal circumstances and preferences.
It’s really important to remember that even if you find a low headline rate, there are often an array of other fees to factor in that might mean it’s as good a deal as you previously thought. To understand what kind of costs you might face, have a look at our article Mortgage fees and costs explained. This is why it’s important to get advice from a mortgage broker or advisor before committing to any particular deal.
Bear in mind too, that although most long-term fixed-rate mortgages are portable, so you can take them with you if you move home, you will need to effectively re-apply for the mortgage if you want to do this. Many lenders have tightened up their affordability checks given rising living costs, so there’s a risk you might not be able to move your mortgage across to a new property in the future, especially if your circumstances have changed. You should also note that if you are planning a move and you need additional borrowing, this will usually have to be arranged at a different rate to your existing mortgage, so you’ll effectively end up with two mortgages on the same property.
Speaking to an experienced mortgage advisor can help you to understand your options and get a great deal on your mortgage. If you’re looking for expert mortgage advice, you can speak to an independent mortgage broker with Unbiased. Every advisor you find through Unbiased will be FCA-regulated, qualified and unconnected to product providers – so they can offer you truly unbiased advice.
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