Two-Year Mortgage Fixes to Become Cheaper Than Five-Year Deals
In a notable shift in the mortgage market, two-year fixed-rate mortgages are anticipated to become more affordable than their five-year counterparts this year. This marks a significant change since the brief tenure of Liz Truss as Prime Minister. For nearly a year, five-year fixed rates have been less expensive than two-year options, a trend that began after Truss’s controversial mini-Budget in 2022. Market expectations suggested that interest rates would decline over the next five years, leading to this pricing dynamic.
Experts predict that this trend will reverse in 2025 as the Bank of England is expected to implement further rate cuts. Fixed mortgage rates are largely influenced by swap rates, which reflect long-term forecasts for future Bank of England base rates. Generally, longer-term fixed mortgages are pricier due to the inherent uncertainty about future interest rates. However, the recent period of elevated interest rates has led to market expectations of a decline over the long term.
Expert Insights on the Mortgage Landscape
Nicholas Mendes from John Charcol brokers notes, “Given the latest economic indicators and evolving market expectations, it seems likely that two-year fixed mortgage rates will dip below five-year rates by mid to late 2025. When investors foresee significant rate reductions in the near future, shorter-term swap rates typically decline faster than longer-term rates, resulting in cheaper two-year fixed mortgages.”
Simon Gammon, managing partner at Knight Frank Finance, adds, “If lenders gain confidence that inflation will remain manageable in the short term, we could see two-year fixed rates priced below five-year products this year.” However, he cautions that this outlook has faced challenges recently, particularly after January’s inflation data came in higher than anticipated. He states, “A spike in energy prices is on the horizon, and the ramifications of a potential trade war remain uncertain, introducing considerable fluctuations in the short-term interest rate landscape.”
Chris Sykes, technical director at Private Finance, emphasizes that the gap between the two types of fixed rates may begin to narrow. He explains, “Historically, two-year fixes have often been cheaper than five-year fixes. If rates stabilize towards the end of the year and the Bank of England’s Monetary Policy Committee indicates no further base-rate changes, we could witness a continued narrowing of the gap. As five-year rates become less predictable, or less so than two-year rates, it’s plausible that we will see two-year products becoming more economical again.”
Currently, according to Moneyfacts, the average two-year fixed mortgage rate stands at 5.40%, while the average five-year rate is slightly lower at 5.23%. Data indicates that the average two-year fixed rate has decreased year-on-year.
Alper Kara, a professor of banking and finance at Brunel University, comments, “There’s a growing sentiment that two-year fixed-rate deals might become cheaper than five-year deals later this year. As the Bank of England approaches actual rate cuts, shorter-term swap rates will start to reflect this more directly, potentially leading to two-year mortgage rates falling below five-year rates.”
Implications for Households
Experts suggest that if two-year mortgage deals do indeed become cheaper than five-year deals by late 2025, individuals considering remortgaging will face a new dilemma regarding their options. Currently, many borrowers prefer two-year rates over five-year ones, betting that rates will lower when they need to remortgage in two years. Last year, the number of borrowers opting for two- and five-year mortgage deals was equal, a stark contrast to early 2022, when twice as many borrowers chose long-term options, according to UK Finance data. However, if two-year deals become less expensive, this trend will likely reverse.
David Hollingworth of L&C Mortgages states, “This scenario will reignite the question of whether borrowers prefer the security of a longer-term fixed rate. Recently, many have been willing to pay a premium for shorter-term rates, anticipating that they could switch to a better deal sooner.”
Should You Consider Fixing Your Mortgage Now?
If your current mortgage fix is nearing its end, it’s advisable to start exploring new deals approximately three months ahead of your expiration date. Most lenders allow you to secure a new deal several months before it’s needed, enabling you to lock in a rate now even if your agreement concludes in May. This strategy provides protection against rising rates while still allowing you the option to switch to a cheaper deal if rates decrease.
Another alternative is to consider a tracker mortgage, which will fluctuate in tandem with the Bank of England base rate. Although these options are typically pricier than fixed rates, they offer flexibility, allowing borrowers to wait before locking in a fixed rate that may become more affordable in the future.
The Impact of Liz Truss’s Mini-Budget
Since the pivotal moment of Liz Truss’s mini-Budget in September 2022, five-year rates have consistently been cheaper than two-year deals. On the day of the mini-Budget, the average rates for both two- and five-year fixed mortgages were at 4.74% and 4.75%, respectively. However, just a week later, these rates surged to 5.17% and 5.1%. The upward trend continued, peaking at an average two-year fixed rate of 6.65% on October 20, 2022. The mini-Budget significantly escalated market expectations for interest rates, which in turn influenced fixed mortgage rates.
