Homeowners and buyers are facing a tough decision: should they lock in a mortgage rate for two years or five? Last year, most people went for two-year fixes, betting on rates dropping quickly. But now, with rates expected to stay higher for longer, five-year fixes are looking more tempting.

What’s Going On With Mortgage Rates?

Since the beginning of 2024, mortgage rates have been playing a game of “up they go”, which has surprised a lot of people. Back in January, experts thought the Bank of England would start cutting rates in March. However, stubborn inflation put a stop to that.

Now, most reckon the first rate cut won’t happen until August. This means the cheapest fixed rates haven’t dropped – they’ve actually gone up by about 0.5 percentage points since January!

Right now, the average five-year fixed rate is about 0.43 percentage points cheaper than a two-year fix, according to Moneyfacts. The best deals available are 4.28% for a five-year fix from Santander (with a £999 fee) and 4.78% for a two-year fix from Halifax (with a £1,099 fee). Both of these deals are for buyers, not people remortgaging.

The Five-Year Fix Advantage – Saving £57 Every Month

Let’s say you have a £200,000 mortgage over 25 years. By snapping up that cheap five-year deal, you could save £57 each month compared to the cheapest two-year option. That’s a decent chunk of change!

What Are People Doing?

Mortgage broker L&C says it’s a pretty even split between people choosing two and five-year fixes. Some people are sticking with the hope of rates falling, while others are playing it safe by locking in a rate for longer.

Should You Fix for Five Years?

The biggest reason to go for a five-year fix is that it’s generally cheaper right now. But the real question is: what will happen to interest rates in the long run?

Nobody wants to be stuck with a 5% rate for five years if they could have snagged a 3% rate by remortgaging after two.

The Crystal Ball of Interest Rates – What Do the Experts Say?

The Bank of England predicts that the base rate will drop from 5.25% to around 3.75% by the end of 2026. But remember, this prediction has actually become less optimistic compared to a few months ago.

Lenders also use something called “swap rates” to figure out their fixed rates. These rates suggest they think fixed rates will be lower in the future.

When Will We See Mortgage Rates Drop?

Experts say we’ll only see big drops if the prediction for future interest rates gets even lower. This depends on how quickly inflation goes down and when (and if) the Bank of England starts cutting rates.

Some experts, like Peter Stimson from MPowered Mortgages, believe rates have already peaked and are unlikely to go up from here. However, he warns that rates might not drop as much or as quickly as people hope.

The New Normal – Don’t Expect to Go Back to 1% Deals

Most experts agree: those super-low mortgage rates we saw a few years ago (we’re talking less than 1%!) are gone for good. The general feeling is that rates will eventually settle around 4%, but it’s impossible to say for sure.

The Bottom Line – It’s All About Your Situation

Choosing the right mortgage term comes down to your individual circumstances and your best guess about future interest rates.

Here’s a breakdown:

• Two-Year Fix: A good option if you’re willing to gamble on rates falling within the next couple of years and you think you might move home before the five years is up.
• Five-Year Fix: Offers more security and peace of mind, especially if you plan to stay put for a while. You’ll benefit from lower rates now and won’t have to worry about remortgaging for five years.
• Tracker Mortgage: Worth considering if you really think rates will fall and you want the flexibility to switch to a fixed rate later on.

Don’t forget: There are also three-year and even ten-year fixes out there! It’s always a good idea to talk to a mortgage broker to get personalised advice and find the best deal for you.