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Five-year fixed rate premium falls to seven-year low

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26/01/2021
Now borrowers can lock into a longer-term fixed rate without paying much more than a two-year deal
Five-year fixed rate premium falls to seven-year low

The rate gap between two- and five-year fixed rate mortgages has fallen to its lowest level since 2013, according to Moneyfacts.

The annual average two-year fixed rate in 2020 was 2.28%, compared to an average five-year fixed rate of 2.55%, meaning the rate gap was just 0.27%.

The financial information provider said this is the lowest annual mortgage rate gap it has recorded since 2013.

The gap shrunk further in January 2021 to just 0.17%, with the average two-year fixed rate now 2.52%, and the average five-year fix just 2.69%.

Eleanor Williams, finance expert at Moneyfacts.co.uk, said: “Historically, two-year fixed products have been popular with borrowers, however while the economy remains full of uncertainty, some may find themselves ultimately better off with a five-year fixed rate mortgage.

“Although five-year deals generally carry higher rates than their two-year equivalents – as borrowers are effectively purchasing the longer-term stability and protection from future interest rate increases these provide – with the gap between the two options currently so low, this may be an opportune time to secure the peace of mind a longer-term fixed rate can bring.

“Those who opt for shorter-term deals such as a two-year fixed will, at the end of their initial term, either face the stress and potential costs and fees involved in securing a new deal, or will revert to their lender’s standard variable rate (SVR) – which at an average rate of 4.41% is likely to see their mortgage payments increase.

“It is also impossible to predict what rates will be available in two years’ time and, as we have seen this past year, unprecedented events can upset even the best laid plans and many consumers have faced unexpected changes to their circumstances that may make refinancing less simple in the future.”

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