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Why five-year fixed rate mortgages are cheaper

“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.

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