The difference in interest rates between two and five-year fixed mortgages is the smallest it has been since 2013, according to new figures.
In 2020, the average annualised rate gap was just 0.27 per cent, according to data from comparison site Moneyfacts.
Traditionally, two-year fixes have been popular with buyers because their rates were much lower – but this is now not the case.
There is currently not a big gap between interest rates on two and five-year fixed mortgages
The annual average two-year fixed rate over the course of 2020 was 2.28 per cent, while the five-year fixed rate was 2.55 per cent.
Eleanor Williams, finance expert at Moneyfacts, said: ‘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.’
This was the smallest gap Moneyfacts had recorded for eight years. It was down by 0.09 per cent compared to the average of 0.36 per cent for 2019, and much smaller than the 0.64 per cent gap recorded in 2016.
The gap could also be shrinking even further. The rate gap for today alone is 0.17 per cent, the lowest daily gap since 2013.
A smaller gap generally suggests more competition in the mortgage market. That was certainly the case this year, as buyers piled in to the market when it reopened following the spring lockdown.
The latest HMRC data showed that residential property sales were up over 30 per cent in December 2020 compared to 2019, as buyers rushed to meet the stamp duty holiday deadline.
Should I consider a five-year fixed deal?
Generally, five-year fixed mortgage rates are higher than two-year because the borrower is paying for the security of knowing their rate will not change for a longer period.
If you are being offered an attractive five-year rate, and the gap between that and a comparable two-year deal is low, locking it in now could save you money in the long term and also help you to budget for the future.
‘For borrowers who are concerned about market fluctuations and wish to be able to budget easily, a five-year fixed rate mortgage can provide some much-needed peace of mind and security,’ said Williams.
Data from the comparison site Moneyfacts shows that there was only a 0.27 per cent difference in interest payments between five-year and two-year fixed term mortgages in 2020
Once a fixed term ends, borrowers who do not remortgage will be placed on their lender’s standard variable rate of interest, which is often much higher.
Remortgaging comes with fees attached, too.
Alex Winn, mortgage expert at online mortgage broker Habito, said: ‘While you’ll benefit from a lower interest rate by picking a two-year fix, and could refinance sooner if interest rates fall further, you would have to pay the costs of remortgaging again in 24 months’ time – whether that be for product fees, or brokerage fees (though many brokers don’t charge).
‘And, if you forget to remortgage in time, you could be temporarily put on your lender’s more expensive standard variable rate which can be as high as 6 per cent.
‘So, it’s worth keeping all of that in mind, when comparing the true costs of deals of different lengths.’
A five-year fix could also help borrowers who and are worried about their ability to refinance again in two years’ time – for example people who are planning to become self-employed or are worried they may be made redundant.
You do not need to tell your mortgage provider this as long as you can keep up your payments.
However, there is also an argument to say that, with so much uncertainty in the wider economy at the moment, making a five-year commitment might be unwise.
That is particularly the case for those on higher loan-to-value mortgages, such as first-time buyers. They have seen mortgage rates on products with 10 per cent deposits increase significantly since before the pandemic, in some cases by more than one per cent.
Therefore, they may not want to be tied into a five-year deal if interest rates start to come down.
Most mortgages are subject to early repayment charges, which mean that you will have to pay a fee if you exit the deal before the fixed period ends.
This can be up to about 5 per cent of the total outstanding mortgage balance, but it depends on how early you exit.
Therefore, borrowers who think their living circumstances or plans might change in the near future would also be wise to avoid a long term fix.
Interest rates for 10 per cent deposit mortgages have jumped since the pandemic started
‘As always, consider your own circumstances,’ advised Jonathan Harris, managing director of mortgage broker Forensic Property Finance.
‘If you know you will stay in your home for the next five years, then a five-year fix will give you security at a competitive rate.
‘If there is a chance that you might move within five years, it might be better to opt for a shorter fix so that you aren’t caught out by early redemption charges if you move during the fixed term.
‘In theory, you can port most mortgages to your new home but this is not necessarily guaranteed.’
However, others have said that interest rates could remain low for a long time, meaning that there would be little need for a longer-term fix.
Dominic Agace, chief executive of Winkworth estate agents, said: ‘With interest rates set to remain low for a long time, and with life always changing, I personally would tend to go with the two year fix at the moment, to build flexibility into life decisions without being caught by any additional early redemption charges.’
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