Should I get a two-year or five-year fixed rate mortgage? - Times Money Mentor (2024)

With many experts suggesting that interest rates might have peaked and could start to fall next year, it can be tricky to know how long to fix for if you’re looking for a new mortgage. Here we explore the different options.

If you are coming to the end of your mortgage deal and have decided that you would like to fix, the next question you will most probably be asking yourself is: how long should I fix for?

It’s not an easy question to answer at the moment. Mortgage rates are high at the moment, so any misstep will probably be even more expensive than usual.

In this article, we cover:

• How expensive are mortgages at the moment?
• Where will the Bank of England base interest rate go next?
• Should I get a two or five year fixed mortgage deal?
• Should I get a tracker mortgage?
• Is it worth speaking to a mortgage broker?

Read more: Remortgaging in 2023: Should I fix my mortgage now?

How expensive are mortgages at the moment?

The bad news is that mortgages are expensive at the moment compared to the last decade. They have been rising since the Bank of England started hiking rates in December 2021. Before that you could get a sub 1% deal, albeit with a hefty deposit.

The average two-year fixed-rate mortgage back then was 2.34%, while the average five year fix was 2.64%. Compare that to the current average now of 6.55% and 6.04% respectively, according to Moneyfacts.

For an £250,000 mortgage over 25 years, the difference in your monthly repayments for a two year fix taken out in 2021, compared to now, on average, would be £594, or £7,128 a year.

For a five year fix, the difference would be £478 a month or £5,736 a year.

During the era of low rates two-year fixes tended to be lower than five-year fixes, suggesting uncertainty by lenders now over the future of rates staying high. But currently, opting for a longer deal is likely to mean your monthly repayments will be lower.

But while a lower interest rate might seem tempting, if mortgage rates come down within the next five years, you could end up paying above the odds until the deal ends.

Where will the Bank of England base interest rate go next?

The Bank of England’s base interest rate is currently 5.25%, it rose from 5% in August but after better than expected inflation figures, was held at the next meeting in September. Had they gone up, it would have been the 15th consecutive increase.

It is impossible to know with any certainty how interest rates will change. However, financial markets expect that we have reached – or very nearly – the peak. The Bank’s own forecast still suggests rates could hit 6% before starting to fall mid-2024, but will stay around 4% until the end of 2026.

Lenders will factor in future expectations of rate movements when pricing fixed deals. It is therefore possible that any future rises have already been ‘priced into’ fixed mortgage rates. This means they wouldn’t necessarily increase and may continue to fall, unlike tracker mortgage rates that automatically rise or fall in line with base rate changes.

When and how quickly interest rates begin falling again will depend on how quickly the Bank of England can rein in inflation. Find out more about how interest rates are projected to change.

Should I get a two or five year fixed mortgage deal?

Your mortgage is likely to be your biggest expense, so it is important that you take time over any decision. Consider speaking to a professional mortgage broker in the first instance who can take into consideration your personal circ*mstances and the wider market.

When considering how long to fix for, it’s worth taking into account the current forecasts around mortgage rates. If you think they’ll stay where they are for several years, or even potentially increase, a five-year deal may make sense.

While mortgage rates have started to ease since August 2023, they are still near their highest level since 2008.

However, most forecasts anticipate a decline in interest rates from around 5.25% now to 4% by the end of 2026.If this is reflected in future mortgage rates and you opt for a shorter deal now, then you will only be paying the higher rate for two years rather than five.

Mortgage brokers say those who are currently remortgaging are increasingly considering tracker deals. This means if interest rates fall, their monthly payments will also fall. We explain more about tracker mortgages below.

Of course rates could still increase further. So there is no easy answer on which deal to choose.

If you value certainty, a longer deal may be for you

One advantage of a five-year fixed-rate mortgage over a shorter deal is that you’ll know with certainty how much you’ll have to pay each month until the deal ends.

If you opt for a two-year fixed rate deal, you only have certainty for that time period. There’s a chance you could face a nasty shock to your finances at its conclusion.

You should also consider mortgage fees, which are often charged when remortgaging or taking out a new mortgage.

Read more: Help! Our cheap five year fixed-rate mortgage is coming to an end

Five-year mortgage deals are currently cheaper than their two-year counterparts

With the average five-year mortgage rate at 6.04% and the average two-year deal at 6.55%, your monthly repayments are likely to be cheaper with the former.

Using our mortgage repayment calculator, this is what your monthly repayments will look like if you take out an average two-and five-year fixed-rate mortgage deal with a balance of £250,000 and 25 years remaining:

In addition to lower monthly repayments, you’ll also be clearing more of the balance of the mortgage with the five-year mortgage, rather than just interest.

However, these cost benefits only apply for the duration of the first two years of the term. After this, if mortgage rates come down, fixed deals may be cheaper and you might regret committing to the longer deal.

Read more: ‘Can we still get a mortgage if my partner has bad credit?’

Should I get a tracker mortgage?

A tracker mortgage is directly linked to the Bank of England’s base interest rate, usually set at a certain amount above it. For example, if you had a tracker mortgage at 5.5%, when the Bank of England’s base rate increased by 0.5 percentage points in June, your rate would’ve increased to 6%.

Unlike fixed mortgages, most trackers don’t have early repayment charges (ERCs) if you want to leave and switch to another deal. This means opting for a tracker mortgage could save you money in the short run, and give you time to watch how interest rates evolve before locking into a fixed deal down the line.

However, further rises in the base interest rate are anticipated. Any increase in the base rate will be directly reflected in your tracker mortgage rate, which could push costs above what you would pay with a fixed deal.

However, the flexibility of being able to switch to a fixed mortgage deal without paying a fee means this may not put you off choosing a tracker mortgage deal for the short term. If this is the case, make sure the tracker mortgage you opt for doesn’t come with ERCs.

Read more: ‘I’m struggling to pay my mortgage, should I switch to interest-only for six months?’

Is it worth speaking to a mortgage broker?

Everybody’s situation is unique, and the mortgage deal that is right for one household may not necessarily be right for you. Speaking to a mortgage broker can give you a good idea of what deals are out there and within your budget. You can get estimates using our mortgage comparison tool.

If you’re concerned by the potential leap in your mortgage costs and your ability to meet them, it’s worth speaking to your lender.

Banks must currently offer struggling customers flexibility, including the option to switch to an interest-only mortgage deal for up to six months without this affecting their credit score.

It’s worth noting that if you switch to interest-only as a short-term option, you’ll increase your costs in the long term as you won’t be clearing your mortgage balance for a period of time. But there’s nothing to stop you overpaying in future once you are on a firmer financial footing.

See six things to do if your fixed-rate mortgage deal is ending.