Prices of five-year fixed-rate mortgages have risen in the past month, more than their two-year equivalents.
Two- and five-year fixed mortgages are the most popular choices among mortgage lenders, but they each have their pros and cons.
Five-year terms are preferred by borrowers who want longer-term certainty about their repayment levels and are unlikely to move within that time frame. Two-year fixed rates offer a little more flexibility.
In recent years, two-year repairs have been more expensive than five-year repairs. This is because when interest rates are high, borrowers prefer to lock in their interest rate for a shorter term, hoping that interest rates will fall and they can benefit from lower prices when their deal expires.
According to Moneyfacts.co.uk, the average two-year interest rate increased by 0.13% in December and now stands at 5.52%. However, the typical five-year mortgage rose by more: 0.19% to 5.28%.
Although the five-year option is cheaper, Moneyfacts said it has felt the biggest monthly increase since August 2023. This is a response to rising swap rates, which lenders use to set their prices.
And since the start of 2024, this average hasn’t fallen as much as its two-year counterpart. Moneyfacts data shows that at the beginning of January 2024 the average five-year fixed interest rate was 5.55% – the interest rate is now 0.27% lower at 5.28%. However, the average two-year fixed interest rate fell by 0.41% over the same period, from 5.93% to 5.52%.
Rachel Springall, financial expert at Moneyfacts, said: “This will be disappointing news for borrowers who prefer to get a longer-term deal.”
But she urged people not to be put off by the alternative of doing a new deal – going back to your lender’s lender. standard variable rate (SVR) – was an even more expensive option.
“Borrowers would be wise not to stick with their fixed rates,” she said, “as they still charge much more than their fixed rate counterparts.
“There are estimated to be millions of borrowers who have not yet paid off their mortgages since interest rates started rising in 2021, so seeking advice is wise.
“Those who signed a five-year fixed deal in 2019 would have been charged an average of 2.74%, but that rate has almost doubled, now at 5.28%.”
Springall gave an indication of what homeowners could expect in 2025. “Borrowers will be hoping that mortgage rates will fall next year,” she said, “and while there is speculation of multiple cuts to the Bank of England’s base rate, persistent inflation may delay such cuts. decisions.
“Moreover, the current market proves that a basic interest rate reduction does not always mean that fixed mortgage rates will immediately fall if there are other economic challenges that lenders must take into account.”