As my five-year mortgage term comes to an end, I am faced with the challenge of navigating a complex and expensive home loan market. One major change I have noticed is that five-year mortgages now tend to be cheaper than two-year deals. This goes against my previous experience, where shorter-term mortgages typically had lower rates. I wondered if I was going mad or if there was a reason behind this shift.
In reality, you are not going mad. Currently, the average two-year fixed mortgage rate is 6.23%, while a typical five-year deal costs 5.86%, according to financial data firm Moneyfacts. This trend of five-year deals being cheaper is recent and has been widening over time.
In the past, shorter-term fixed mortgages were cheaper because lenders felt more comfortable dropping rates for shorter deals. On the other hand, lenders traditionally charged more for longer-term mortgages as borrowers were able to secure a rate for a longer period of time.
To understand why this has reversed, we need to explore something called interest swap rates. Swap rates refer to the interest rates that mortgage lenders pay other lenders for the cash they borrow. These rates affect fixed-term mortgages, as banks typically “buy” money for two, three, five, or ten years. The pricing of swap rates is determined through negotiations between banks, which also involve predictions about the future state of the economy.
The Bank of England uses this bank data to produce an average called Sonia (the Sterling Overnight Index Average). Currently, the data shows a strong trend of lenders raising rates on two-year swaps and mortgages more than other term lengths. This is due to lender uncertainty caused by the current interest rate turmoil. The Bank of England has raised its base rate 13 consecutive times in response to soaring inflation, and financial experts believe that the base rate and swap rates will continue to rise this year.
However, beyond that point, experts expect inflation to fall and for borrowing to return to normality. This is why lenders are charging less for longer-term loans. Interestingly, borrowers also believe that rates will fall and are still opting for two-year mortgages, despite the higher rates. According to Moneyfacts, 54.8% of homeowners choose two-year deals, while only 27.9% opt for five-year deals.
For borrowers who need a mortgage, it is important to explore their options as soon as possible. Utilizing a mortgage calculator and seeking advice from a mortgage broker can help borrowers secure a rate that matches their needs. For those whose fixed-rate deal is ending soon, it is worth exploring how much it would cost to remortgage now and potentially lock in a new deal. It is also crucial for home buyers to secure rates early to know their monthly payments and be prepared for the possibility of falling house prices due to higher mortgage rates. The best way to compare mortgage costs and find the right deal is to speak to a reputable broker who can assist in finding the perfect mortgage.
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