The gap between the average interest rate on a two- and five-year fixed-rate mortgage is at its narrowest in five years. The average five-year fix costs 2.92 per cent, compared with 2.52 per cent for a two-year fix, according to finance website Moneyfacts.
With the Monetary Policy Committee now split 6-3 on whether there should be a rate rise, markets are factoring in another increase in base rate, perhaps as soon as August. This expectation is pushing up two-year Swap rates (the rate lenders pay to borrow from each other), with lenders raising the cost of two-year fixes accordingly.
With two-year fixes available from 1.31 per cent, compared with five-year fixes from 1.83 per cent, borrowers do not have to pay much more for the longer fix. The other issue with taking a two-year fix now is that you may have to remortgage at a time when base rate is higher, and another fixed rate taken out at that time could cost a lot more money.
While there are some excellent five-year fixed rates available at sub-2 per cent for those requiring the lowest loan-to-values, it is important not to fix for longer than you are absolutely sure about – or face paying a hefty early repayment charge to get out of the mortgage during the fixed rate. If there is a chance that you might move house again within five years, a shorter-term fix might make more sense. Many five-year fixes can be ‘ported’ to another property but there is no guarantee that the lender will agree to this when the time comes.