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Why five-year fixed rate mortgages are cheaper

Why five-year fixed rate mortgages are cheaper
(Chris J Ratcliffe/Bloomberg)

Besides inflation being more than triple the 2 per cent target, another notable economic circumstance that has emerged is the ability to secure a longer-term mortgage deal at a cheaper rate when compared to a two-year fix.

Typically, the shorter the fix, the cheaper the mortgage. But Halifax, part of the UK’s largest mortgage lender, is one provider offering some five-year fixed rates that are cheaper than their two-year counterparts.

A homemover, for example, can borrow up to 60 per cent loan-to-value at 2.48 per cent for five years, if they pay a £999 fee. Meanwhile, a higher fixed rate of 2.54 per cent is available for two years.

Halifax's fixed products for homemovers

 Rate (%)Max LTV (%)Fee
Two-year2.54

60

£999

Five-year2.48
10-year2.48
Two-year2.94

60

£0

Five-year2.82
10-year2.82
Two-year2.59

75

£999

Five-year2.58
10-year2.58
Two-year2.99

75

£0

Five-year2.98
10-year2.98
Two-year2.64

80

£999

Five-year2.63
Two-year3.04

80

£0

Five-year2.98
Two-year2.64

85

£999

Five-year2.70
Two-year3.04

85

£0

Five-year3.08
Two-year2.75

90

£999

Five-year2.90
Two-year3.09

90

£0

Five-year3.12
Two-year3.05

95

£999

Five-year3.29
Two-year3.42

95

£0

Five-year3.51
Bold indicates cheaper rate against two-year deal. Correct as of April 28. Source: Halifax

Nationwide, another one of the country’s largest lenders, and TSB, are also offering five-year fixes that rival two-year deals.

“Like most mortgage lenders our fixed rates are closely linked to swaps rates – effectively the rate at which we can borrow the money needed for our mortgage business,” says Deby Herring, head of mortgages at TSB.

“Based on the Sonia [sterling overnight indexed average] view, five-year swaps are currently cheaper than two-year by about 0.22 percentage points, enabling TSB to price them below a two-year fixed rate.

“Our five-year business is currently stronger than two-year for new applications. However, we have only very recently implemented that price differential, so we would need more time to evaluate the data before we can point to any clear shifts in what borrowers are choosing.”

With mortgage rates closely linked to the market Sonia rates, Herring says the market anticipates they are likely to rise through 2022 before stabilising in 2023, and then reducing gradually.

The margin between the average two and five-year fixed rate mortgage reduced to 0.15 per cent at the beginning of April, according to Moneyfacts, the lowest recorded by the data provider since February 2013, when the margin was 0.08 per cent.

With the cost of short and long-term borrowing having converged to reflect the cost of borrowing at an institutional level, Chris Sykes, technical director at Private Finance, says he has seen an increasing number of clients opt for longer fixed terms of at least five years.

“We have seen a paradigm shift in the interest rate environment, from one where it made sense to take the shortest-term mortgage possible post-2008 until late 2021 as it was highly likely a cheaper rate would be available when you came to remortgage, to one where rates are rising and it is possible that the base rate could catch up to the best available rates today in the coming year or two.”

Sykes adds that some longer-term products, such as 10-year deals, are almost in line with many five-year deals, with the former previously often carrying a premium of at least half a percentage point.

“I think, if anything, the average borrower can take some comfort in these rates. We all know that we are in for a relatively wild ride over the next two years. That is simply reflected in the rates that we are seeing today.