Two- and five-year fixed mortgages are the most popular choices amongst mortgage borrowers – but they each come with pros and cons.
Five-year fixes are favoured by borrowers who want longer-term certainty for their repayment levels and who are unlikely to move within that time frame. Two-year fixed rates, meanwhile, offer a little more flexibility.
Over the last couple of years two-year fixes have been more expensive than five-year fixes. This is because, with interest rates high, borrowers would rather fix their rate for a shorter term in the hope rate will fall and they can benefit from lower prices when their deal ends.
According to Moneyfacts.co.uk, the average two-year fix has risen by 0.13% in December and is now 5.52%. The typical five-year mortgage, however, has risen by more – 0.19% to 5.28%.
Whilst the five-year option is cheaper, Moneyfacts said it had felt its biggest monthly rise since August 2023. This is in response to rising swap rates, which lenders use to set their pricing.
And, since the start of 2024, this average has not dropped as much as its two-year counterpart. Moneyfacts’ data shows, at the start of January 2024, the average five-year fixed rate was 5.55% – the rate is now 0.27% lower at 5.28%. However, the average two-year fixed rate has dropped by 0.41% over the same period, down from 5.93% to 5.52%.
Rachel Springall, finance expert at Moneyfacts, said: “This will come as disappointing news to those borrowers who prefer to lock into a deal for the longer-term.”
But she urged people not to be put off fixing into a new deal as the alternative – reverting to your lender’s standard variable rate (SVR) – was an even more expensive option.
“Borrowers would be wise not to stick on their revert rate,” she said, “ as these are still charging much more than their fixed rate counterparts.
“There are estimated to be millions of borrowers who have not yet re-fixed their mortgage since rates started to rise in 2021, so seeking advice is wise.
“Those who locked into a five-year fixed deal back in 2019 on average would have been charged 2.74%, but that rate has almost doubled, now 5.28%.”
Springall offered an indication of what homeowners could expect in 2025. “Borrowers will hope that mortgage rates will drop next year,” she said, “and while there is speculation over multiple cuts to the Bank of England base rate, stubborn inflation can delay such decisions.
“In addition, the present market proves that a base rate cut does not always mean fixed mortgage rates will immediately fall if there are other economic challenges in play for lenders to consider.”
