Two-year fixed mortgages drop below 5% for the first time in months – but should you fix now?
Rates on two-year fixed mortgage deals have dipped below 5% for the first time in five months. But brokers believe fixed deals could get even cheaper as the year draws to a close – so should you fix now or hold out?
Lenders have been steadily cutting interest rates on fixed mortgage deals for several months. Last week, Nationwide launched a 4.99% two-year fix and today Virgin Money followed up with a 4.97% two-year deal – the first time fixed deals of this length have swung below 5% since June.
While interest rates on two-year fixes continue to lag behind those of longer deals, mortgage brokers expect further modest rate cuts to continue in the weeks ahead.
So is it time to fix? We round up the latest information below. You can also see our Homes and Mortgages Hub for guides and tools to help you get the best deal on your mortgage.
Fixed mortgage rates pass 'important benchmark' – with further good news expected
In July, mortgage turmoil resulted in fixed rates on two-year deals peaking at 5.96%, while rates on five-year deals hit 5.28%. But fixed rates have been coming down since then, with the top two-year and five-year fixes (for first-time buyers and home-movers) now sitting at 4.97% and 4.58% respectively.
The improvement in rates means the top two-year fixes now cost around £59 a month or £708 a year less per £100,000 owed, while the top five-year fixes are £40 a month or £480 a year less.
In the days since the Bank of England's decision to hold the base rate at 5.25% for the second time in a row, HSBC and NatWest have twice cut rates on their fixed mortgage deals, while Nationwide has launched its 4.99% two-year fix (available to home-movers and existing Nationwide mortgage holders) and Virgin Money its 4.97% two-year deal (available to first-time buyers and home-movers).
David Hollingworth, of broker London & Country, said two-year fixes going below 5% was an "important benchmark" reflecting the improved outlook for interest rates overall. He added that we could see more cuts still to come.
My mortgage deal is ending – should I fix or go on to a tracker?
If you need a mortgage deal, whether it's better to fix your mortgage again or move on to a tracker largely depends on when your current deal ends.
- Current deal ending in the next six months? Consider locking in a fixed deal now, as holding out could be risky. Here, you've got some time to wait and see whether interest rates on fixed mortgage deals continue to come down. Lock in a fixed deal now and you'll have insurance against any rate rises and the flexibility to switch to a cheaper deal if one launches before your current rate ends (but remember that rates could go up or down).
The other advantage of fixing is that it gives you price certainty. No one knows exactly what will happen to fixed rates, though mortgage brokers do believe further rate cuts could happen as we approach the end of 2023.
Ray Boulger, of mortgage broker John Charcol, expects rates on two-year fixes to edge down slightly, while he predicts rates on five-year fixes could drop to 4.5%.
But David Hollingworth warned that waiting for rates to drop further has some risks: "Firstly, less positive data could emerge that puts the brakes on or reverses improvements. Secondly, the time ticking down could lead to drifting on to high standard variable rates."
As a result, he says it's still sensible to start looking at what's on offer around three to six months before the end of your current deal. We've got full details on the pros and cons of locking in early – including whether you'd be able to ditch a deal penalty-free – in our Getting ready to remortgage guide.
- Current deal ending imminently? Fixing is the cheapest option right now – though consider a tracker if you're not ready to lock in yet. Here, an argument in favour of moving on to a tracker still remains, for a short period at least – though only if it's really important to you that fixed rates come down more before you lock in.
There are trackers out there that don't come with early repayment charges (ERCs), meaning you can move to a fixed deal, penalty-free, at any time you like. However, unlike fixed deals, trackers have a variable rate of interest, typically linked to the UK base rate, meaning what you pay can change. But as the base rate appears to have peaked, trackers might not actually get any more expensive than they are now (though of course, there's no guarantee).
Yet the trade-off is that right now the best two-year trackers (5.39%) are substantially more expensive than the best two-year fixes (4.97%), meaning you'd need fixed rates to come down a lot to compensate for having been on a higher tracker rate in the meantime.
Hollingworth said: "The base rate may hold at this point, meaning tracker rates on offer may only be similar to, or not as low as, a fixed deal, so the difficult balance is how much fixed rates would need to reduce by to make paying the higher rate worthwhile."
And Boulger said: "Now that the best two-year fixes are nearly 0.5 percentage points cheaper than the initial rate on the best trackers, the attraction of moving to a tracker whilst waiting for lower fixed rates is very limited, and at current rates I think most people will prefer the certainty offered by a fixed rate, unless their priority is a mortgage with no ERCs."
- Should you fix for two years or five years? It's complicated. Rates on five-year fixes remain lower than two-year fixes, though the gap is narrowing, particularly with remortgage deals. Here's an example of the difference in cost (you can also use our mortgage calculator to compare costs yourself):
On a £150,000 mortgage with 20 years remaining (ignoring fees)...
- A two-year fix at 5.5% would cost £1,032 a month.
- A five-year fix at 5% would cost £990 a month.
- That's £42 a month less, meaning a five-year deal would save you £1,008 over an initial period of two years.
But, say rates had come down significantly by the time you're two years through a five-year fix and you wanted to switch to a better rate – you'd probably have to pay an early repayment charge to ditch your current deal. Typically this would be equivalent to around 2% to 5% of your remaining mortgage balance, or roughly £2,800 to £7,000 using the example above. That would totally wipe out the savings made from being on a cheaper five-year deal in the first place.
However, a five-year fix does give you more protection and peace of mind if rates were to go up, as you have certainty over what you'll pay.
Ultimately, without a crystal ball there's no way of knowing what will happen with interest rates over the next one, two or five years – so there's some risk either way. As Hollingworth puts it: "There are no guarantees, so borrowers need to keep a clear focus on what is right for them at a time when the cost of living remains elevated."
So when choosing how long to fix for, consider what's most important to you. The more you value cost certainty, the more you should hedge for a fix (over a tracker), and fix for longer.
On your lender's SVR? You could save £1,000s with a new deal
There are 100,000s of homeowners on standard variable rates (SVRs) – the rate you pay once your current mortgage deal comes to an end. SVRs, as you'd expect, have a variable rate of interest, which means the rate can change at any time – something that tends to happen when the base rate rises.
Not only that, but SVRs are normally far more expensive than the best fixed or tracker deals out there. Right now, a typical SVR stands in excess of 8%, as the table below demonstrates.
For many on an SVR, including those who have put off switching in the hope interest rates on fixed deals would come down, you should consider locking in a fixed or tracker mortgage now.
Hollingworth said: "Trackers can often be free of early repayment charges, which could offer an alternative option for those that aren't ready to lock in. It's certainly a better option than a high standard variable rate as a holding position."
Here's how much you'd pay on a typical SVR compared with switching to a fixed or tracker deal:
|2 year fix||4.70%||£851||£10,681||£3,215|
|5 year fix||4.85%||£864||£10,515||£3,381|
|10 year fix||4.99%||£876||£10,611||£3,281|
|2 year tracker||5.39%||£911||£11,435||£2,461|
Don't forget to check for product transfer rates too
When you begin the hunt for a new mortgage, you'll have two options:
- Getting a new deal from your existing lender (known as a 'product transfer'). When it comes to a product transfer, most lenders let you lock in a new rate up to six months in advance. Product transfers are also typically quicker than remortgaging and often require less paperwork. The rates are very competitive at present and there are typically fewer fees involved compared with remortgaging.
- Getting a new deal from a different lender entirely (known as 'remortgaging'). If you're remortgaging, most lenders let you lock in a rate at least three months in advance, with many actually letting you secure a deal up to six months early. Though as outlined above, this process can involve more fees and longer, more thorough checks compared with product transfers.
Struggling with your mortgage? See our What to do if you're struggling with your mortgage guide or – if you've already fallen behind on your mortgage repayments – our Mortgage arrears guide.
- Benchmark the rates out there. Our mortgage comparison tool will help you see what's available currently and compare it against what you're paying now.
- Dig out the details of your current mortgage. Such as... What's the rate? What type is it? When's the intro deal over? When must it all be repaid? Will you be penalised to switch deals? What's the loan-to-value (LTV)?
- Check out your existing lender's cheapest deal. Use this rate as a benchmark to beat. Check product transfers.
- If you've savings, use them to bag a cheaper deal. If you still owe more than 60% of your home's value on a mortgage, the more you can do to drop an LTV band, the cheaper your remortgage will be.
- Check out the size of any possible savings on our mortgage calculators. Stick your digits in here... Basic mortgage calculator – including what it'll cost | Compare two mortgages | Compare fixed-rate mortgages | 'How much can I borrow?' guesstimator.
- If you're thinking of applying, it's all about whether you'll be accepted. Lenders need to check if you're 'affordable' and whether you could meet repayments if rates shot up. So see our 17 ways to boost your mortgage chances and don't forget to check your credit report for free. Then read up on how to improve your ability to access credit.
- If you're serious, speak to a broker – they're currently more important than ever. See our full help on how to find a good broker.