Choosing how long to fix your mortgage for is one of those decisions that can genuinely affect your finances for years to come.
However, it often gets rushed through without much thought. Two-year fixed deals remain the most popular choice among borrowers, but that doesn’t automatically mean they’re the right choice for everyone. With mortgage rates moving around quite a bit lately, it’s worth understanding what’s actually happening before locking yourself into any particular deal. Here’s what’s going on with rates right now, and the key things worth weighing up before choosing your next mortgage.
Mortgage rates have had a bumpy ride recently.
Rates broadly fell throughout last year, with the cheapest deals dropping from just over four percent down to just under three and a half percent, largely thanks to several cuts to the Bank of England’s base rate. A similar drop was widely expected to continue into this year, too.
Then, conflict in the Middle East changed expectations, and rates rose by around a full percentage point earlier this year. For someone borrowing £250,000 over 25 years, that kind of increase can add well over £100 to monthly repayments, which is a significant jump for most households to absorb.
Rates have started coming back down again since spring.
Since April, several major lenders have been gradually cutting their fixed rates again, including some of the biggest names on the high street. Despite this recent improvement, the best deals currently available still cost more than they did back in February, so it’s not quite back to where things stood earlier in the year.
If you’re coming to the end of a two-year fixed deal you took out a couple of years ago, there’s a decent chance today’s rates are actually a little lower than what you originally signed up for. Anyone coming off a five-year fix, however, is likely to see a much bigger jump, since rates were considerably lower several years ago than they are now.
Two-year deals aren’t always the cheapest option.
How much you actually save by choosing a shorter or longer fix depends heavily on how much equity you have in your home. For those with a larger deposit or more equity built up, the gap between the cheapest two-year and five-year fixed rates tends to be fairly small, sometimes only a matter of pounds each month.
Interestingly, for people with less equity in their property, a five-year fix can sometimes work out slightly cheaper than the best two-year deal available. Three-year fixed deals, meanwhile, tend to be the most expensive option across the board, mainly because there simply aren’t as many of them on the market to choose from.
Check your loan to value before comparing anything else.
The percentage of your property’s value that you’re actually borrowing, known as your loan to value, plays a huge role in which deals you’ll even qualify for. If you’ve paid down more of your mortgage or your property has increased in value since you first bought it, you may now fall into a lower, cheaper borrowing band than before.
It’s always worth checking where you currently stand before assuming you’ll get the same rates you saw last time you looked. Even a small shift in your loan to value percentage can open up noticeably better deals than you might expect.
Don’t judge a mortgage on its interest rate alone.
Some mortgage deals come with hefty upfront fees, sometimes £1,000 or more, which can easily wipe out the savings from a slightly lower interest rate. A deal that looks cheaper on paper isn’t always the better choice once these extra costs are properly factored in.
Speaking with a mortgage broker can help avoid falling into this trap, since they’ll weigh up rates, fees and any additional incentives together to find what’s genuinely most suitable for your situation. It’s rarely just about finding the lowest headline rate.
Think honestly about how much certainty you actually need.
Choosing a shorter mortgage term gives you the flexibility to switch to a new deal sooner, which could work in your favour if rates happen to fall. The risk, of course, is that rates might not drop, or could even rise further by the time you need to remortgage again.
A longer fix trades that flexibility for genuine peace of mind, locking in your monthly payments for years regardless of what happens to the wider market. The downside is that if rates do fall significantly during your fixed term, you’ll miss out on cheaper deals until your current one ends.
Your future plans matter just as much as current rates.
If there’s a decent chance you’ll move home within the next couple of years, a shorter fixed deal is generally the more sensible choice. Moving during a fixed term often triggers early repayment charges, which can end up costing far more than any savings you made from your rate.
Most lenders do allow you to transfer your mortgage to a new property, but this isn’t always straightforward or cost-effective, and usually comes with its own specific criteria to meet. It’s worth thinking through your plans for the next few years honestly before committing to a longer-term deal.
Tracker mortgages are currently offering some of the lowest rates around.
Right now, tracker mortgages are genuinely standing out as the cheapest option on the market, with the best rates currently starting lower than any fixed deal available. The trade-off is that your rate can move up as well as down, since it follows the Bank of England’s base rate directly.
Most forecasters currently expect the base rate to hold steady or fall further over the rest of the year, but unexpected global events have already shown how quickly that outlook can change. Before choosing a tracker, it’s worth honestly asking yourself whether you could still comfortably afford your repayments if rates did rise unexpectedly.
A three-year fix can offer a reasonable middle ground.
If you’re torn between the flexibility of a two-year deal and the security of a five-year one, a three-year fix sits somewhere in between, offering a bit of both without fully committing to either extreme. It won’t suit everyone, but it can be a sensible compromise for some borrowers.
That said, three-year deals tend to be pricier than both two-year and five-year options, largely because there are far fewer of them available to compare. It’s still worth checking the full cost against equivalent shorter and longer deals before ruling one in or out completely.
