Homeowners could soon see two-year fixed mortgage deals become cheaper than five-year fixes for the first time since Liz Truss’s mini-Budget sent interest rates soaring, experts have predicted.
For the past two years, five-year fixes have been the cheaper option because financial markets expected interest rates to fall in the long term. But that trend could be about to change.
Santander has recently launched a mix of new two and five year fixes at below 4%. It means the lender is now one of five offering deals under the all-important 4% mark, joining the ranks of Nationwide, HSBC, First Direct, Barclays and Santander.
The introduction of sub-4% mortgage rates may be viewed as a positive sign for borrowers, indicating increased competition among lenders.
However, these attractive rates are primarily available to those with substantial deposits, typically around 40%.
Mortgage rates are heavily influenced by so-called swap rates, which reflect how much financial institutions charge to lend to one another. Typically, longer-term fixes cost more due to uncertainty over future rates. However, in recent years, financial markets have anticipated that rates would eventually drop, making five-year deals the more attractive option.
Nicholas Mendes of John Charcol brokers told The I Paper: “Based on the latest economic data and shifting market expectations, two-year fixed mortgage rates are likely to fall below five-year fixed rates in mid-to-late 2025.”
Simon Gammon, managing partner at Knight Frank Finance, agrees, stating lenders could start pricing two-year fixes lower than their five-year counterparts.
However, he warns that recent economic factors—such as unexpectedly high inflation figures in January and looming energy price increases—could create uncertainty.
If two-year deals become the cheaper option, borrowers will face a dilemma: opt for a shorter fix with a lower rate or lock in a five-year deal for long-term stability.
Currently, many homeowners are choosing two-year fixes, hoping that rates will drop further by the time they need to remortgage. Last year, an equal number of borrowers took out two- and five-year mortgages, compared to 2022 when twice as many chose five-year deals, according to UK Finance.
David Hollingworth of L&C Mortgages notes: “The question for borrowers is whether they’re willing to pay a bit more for longer-term certainty. Many have preferred shorter fixes in the hope that rates will fall, letting them switch to a better deal sooner.”
If your current mortgage deal is ending soon, experts advise locking in a new rate up to three months in advance. Many lenders allow borrowers to secure a new deal ahead of time, protecting them from potential rate hikes while leaving room to switch if better deals emerge.
Another option is a tracker mortgage, which moves in line with the Bank of England’s base rate. While these are generally more expensive than fixed deals, they offer flexibility for those expecting future rate cuts.
The shift in mortgage pricing stems from the market turmoil caused by Liz Truss’s disastrous mini-Budget in September 2022.
On the day of the announcement, average two- and five-year fixed rates were around 4.74% and 4.75%, respectively. Just one week later, they had shot up to 5.17% and 5.1%, eventually peaking at 6.65% for two-year fixes in October 2022.
Now, with two-year deals potentially becoming the cheaper option once again, borrowers must weigh their options carefully to secure the best mortgage deal possible.
