Mortgage rate wars benefits two and five year fixed rate borrowers

Homeowners coming to the end of a five or two year fixed rate mortgage deal will welcome new research that shows that average rates on both these terms are now lower than when they locked into their deal.

Research carried out by Moneyfacts.co.uk shows that the average rate on a five year fixed rate mortgage in September 2016 was 3.04%, whereas homeowners looking to lock into a new five year fixed mortgage deal today can get an average rate of 2.63% - 0.41% lower than five years ago. Meanwhile, in September 2019 the average two year fixed mortgage rate stood at 2.46%, but a homeowner coming to the end of their two year fixed deal will find that the average rate on two year deals now stands at 2.38% - a fall of 0.08%.

“Competition within the mortgage market has remained strong throughout 2021, leading to many lenders slashing rates on their two and five year fixed deals resulting in record low rates entering the market,” explained Oliver Dack from Mortgage Advice Bureau. “In fact, homeowners looking to remortgage will find that some lenders are offering rates below 1%. Saying this, when looking at mortgage deals, it is important that borrowers take into account more than just the headline rate, for example by considering fees and incentives, as these can have a substantial impact on the total cost of the mortgage.”

There are many factors that impact how lenders choose to set their mortgage interest rates, including the Bank of England base rate, the housing market and the economy overall. Currently we are in a rate war between lenders that has seen many well-known high street lenders slash rates as they battle to secure new mortgage borrowers and retain existing borrowers on their books. If the house market slows as expected once stamp duty returns to normal it could result in the rates war continuing. Saying this, rising inflation could result in the Bank of England increasing base rate, which could lead to mortgage lenders increasing rates – this will likely first be seen on variable rate deals but could also trickle over to fixed rate deals. Those already locked into a fixed rate deal, however, will see no change to their interest rate during the term of the mortgage even if rates rise on other mortgage deals.

With mortgage rates at record lows it may be tempting for homeowners to take advantage of the rates currently on offer by locking into a five year fixed rate deal. While for some homeowners, remortgaging onto a five year deal will help to provide long-term security that their mortgage repayments will not rise in the coming years, however in some circumstances it may be more cost effective for homeowners to opt for a two year fixed deal. If, for example, the homeowner may move home before the five year fixed term deal ends it could result in them having to pay costly exit fees to leave the deal early, in which case those who may want to move in the next few years may want to consider a two year deal instead. Alternatively, those buying a home with a small deposit of 10% or less may want to consider locking into a two year fixed deal as when they come to remortgage at the end of the two year term, the equity they own in their home may have improved to the extent that they are more attractive to lenders and can secure a better rate as a result.