Traditionally, the shorter two-year fixed rate mortgage has been more popular because it offers both flexibility and lower rates than its five-year counterpart.
However, new data out this week revealed the rate gap between the two products is narrowing. Therefore, the difference in rate between the average two-year and five-year fixed rate deal is currently only 0.17% – the lowest since 2013.
According to Moneyfacts.co.uk, which compiled the data, this creates more of an incentive for borrowers to opt for a longer-term fix.
Eleanor Williams, finance expert at Moneyfacts, revealed figures over the year from January to December 2020 showed the gap between the average interest rates for the two products had plummeted to 0.27%. This year it had fallen even further.
“[This] is even more positive for potential borrowers considering longer-term fixed rates,” Williams added.
Benefits of a longer-term fix
She said fixing for the longer term could be beneficial during the current economic conditions.
“Historically, two-year fixed products have been popular with borrowers, however while the economy remains full of uncertainty, some may find themselves ultimately better off with a five-year fixed rate mortgage,” Williams explained.
“Although five-year deals generally carry higher rates than their two-year equivalents – as borrowers are effectively purchasing the longer-term stability and protection from future interest rate increases these provide – with the gap between the two options currently so low, this may be an opportune time to secure the peace of mind a longer-term fixed rate can bring.”
“Those who opt for shorter-term deals such as a two-year fixed will, at the end of their initial term, either face the stress and potential costs and fees involved in securing a new deal, or will revert to their lender’s standard variable rate (SVR) – which at an average rate of 4.41% is likely to see their mortgage payments increase.
“It is also impossible to predict what rates will be available in two years’ time and, as we have seen this past year, unprecedented events can upset even the best laid plans and many consumers have faced unexpected changes to their circumstances that may make refinancing less simple in the future.”
Of course, it’s advisable to ensure you speak to a broker to ensure a longer deal is suitable for your particular needs and also to provide you with exposure to as many of the products on the market as possible.
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