Why five-year fixed rate mortgages are cheaper

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

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.

“The fact that five-year money and then 10-year money also is in line with it, means that banks are not overly concerned with the long-term interest rate environment, just the short term, which is encouraging.”

Two-year swap rates climbed above both five and 10-year rates in early February, according to data provided by Knight Frank Finance to FTAdviser.

We expect five-year fixes to remain popular until the economic uncertainty reduces.John Phillips, Just Mortgages

John Phillips, national operations director at Just Mortgages, also says the business's brokers have reported a significant increase in demand for five-year fixed rates over the past few months.

“Against the backdrop of financial instability due to rising inflation and energy bills spiking, the certainty of a five-year fixed rate mortgage is certainly appealing. While five-year fixes are usually slightly more expensive in the short-term, this needs to be weighed up against what the situation will be in a couple of years.

“While no one can predict with certainty what the world will look like in 2024, inflation hit a 30-year high last month, so it is likely the Bank of England will continue to increase the base rate to compensate. Therefore, those that fix for two years will pay slightly less in the short term, but when they come to remortgage, they may find rates have increased somewhat.

“Due to the uncertain outlook, the opportunity to ensure the certainty of mortgage payments for the next five years is a very attractive one. Particularly as the difference in rates is currently relatively small, so we expect five-year fixes to remain popular until the economic uncertainty reduces.”

Danny Belton, head of lender relationships at Legal & General Mortgage Club, agrees it is natural that borrowers are looking for greater certainty in unpredictable economic circumstances.

With the cost of living crisis creating uncertainty for borrowers and lenders, Nick Chadbourne, chief executive of LMS, a conveyancing services provider, says that both are interested in securing a cheap rate for longer to ensure that borrowers can continue to afford repayments.

“There is a huge demand from borrowers when it comes to five-year fixes, or even longer, which makes this the most competitive product area for lenders. 

“Increasingly over the past few years we have also seen so many people opt to move house or renovate the one they have. With so many people making this choice, many are now in their ideal home for the medium term.

"If there are no plans to move, it seems the obvious choice is a longer fixed term to help make the most of the property they are in.”

Chloe Cheung is a senior features writer at FTAdviser