High mortgage rates and living costs continue to place pressure on homeowners, but with many commentators expecting rates to come down soon, is now the time to lock into a deal that lasts for five years or longer?
Currently, interest rates on five and 10-year fixed-rate mortgages are generally cheaper than two-year fixed-rates, so 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 future, there’s a risk you’ll be stuck paying a higher rate. However, you may be happy signing up for a longer term fix and the budgeting certainty this can provide you with, regardless of what happens to interest rates.
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 14 consecutive increases in the base rate over the past couple of years these rates have risen substantially, and currently, five-year deals are the cheaper option. For example, at the time of writing (May 2024) the best buy rate stood at 4.34% for a five-year fix, and 4.64% on a 10-year fix, compared to 4.74% on a two-year deal.
Here, we look at why it’ll currently cost you more to fix for a shorter term period, and some of the pros and cons of locking in for longer.
Want to speak to a mortgage advisor? 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 get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.
Why are two-year fixed rates more expensive than five or 10-year fixes?
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 several years 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 that interest rates might stay higher for a few months yet before they gradually start to reduce (assuming inflation remains near to the government’s 2% target).
Teddy Cenaj, mortgages expert at Habito said: “We have seen the difference between two and five-year fixed-term mortgages reduce quite heavily, with customers now finding it cheaper to get a five-year fixed-term mortgage over a two-year one. 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 to purchase a property 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 while rates are relatively high now, no-one can predict where they will be in a few years’ time, and many commentators are expecting rates to begin falling later this year. So, whether to fix for the long-term is entirely down to your personal circumstances and preferences.
It’s really important to remember too 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 as well, 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 are tightening 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. Learn more in our article Moving house with a mortgage – what you need to know.
If you’re not sure whether to wait until you fix your mortgage in the hope that rates might come down, read our guide Should I fix my mortgage now or wait?
Want to speak to a mortgage advisor? 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 get a free consultation with an independent mortgage adviser at Fidelius. Speak with a qualified, FCA-regulated, independent mortgage adviser you can trust. Rated 4.7/5 on VouchedFor from over 1,000 reviews.
Rest Less Money is on Instagram! Check out our account and give us a follow @rest_less_uk_money for all the latest Money News, updated daily.