Five-year fixed-rate mortgages drop to record lows: is now time to secure an excellent rate?

Five-year fixed-rate mortgages have dropped to the lowest rates on record, handing a lift to homebuyers and remortgagers looking to secure an inexpensive deal.

This comes just weeks after rates on two-year fixes dropped below 1% the very first time since 2021.

Here, Which? analyses why home loan rates are falling and explains whether now is the time to secure an excellent rate for the long term.

Five-year fixes hit lowest levels on record

Homebuyers and remortgagers can now take advantage of the cheapest five-year fixed-rate mortgages on record.

Moneyfacts says the present market-leading rate of 1.14% is the lowest it's seen because it started keeping records in 2007.

Nationwide’s deal is available to homebuyers borrowing at as much as 60% loan-to-value (LTV).

Homeowners looking to remortgage at the same LTV can access a slightly higher rate of just one.16% from HSBC.

Two-year fixes have also fallen in cost recently. Last month, we reported on lenders launching deals with rates below 1% the very first time since 2021. The current cheapest two-year fix is offered by Platform, having a rate of 0.95%.

What has became of mortgages during the pandemic?

The mortgage market has suffered throughout the Covid-19 pandemic, but borrowers with large deposits or good amounts of equity within their home have emerged relatively unscathed.

First-time buyers with smaller deposits happen to be worst affected, with deals disappearing and rates of interest rising in 2021.

The great news is the picture has become looking better for borrowers whatsoever quantity of a market.

The financial analysis company Defaqto believes falling minute rates are caused by lenders finally gaining the confidence to provide cheaper deals.

Katie Brain of Defaqto says: ‘While the Bank of England kept rates of interest low throughout the pandemic, we've not seen this forwarded to borrowers like this so far.

‘It has been a turbulent year for borrowers needing a home loan and it is encouraging to determine these services on offer at such great rates.’

Best rates on two and five-year fixes

One of the most popular trends of history few years continues to be the closing of the gap in cost between two-year and five-year fixes.

It was once the situation that borrowers looking to treatment for 5 years needed to pay a substantial premium in return for longer-term rate security, but the gap has now narrowed considerably, with just 0.2%-0.3% now between your best deals.

The chart below shows the very best rates currently available at five popular loan-to-value levels.

In a good example of how competitive mortgage rates are at as soon as, borrowers with a 20% deposit can now obtain a two or five-year deal with a rate of less than 2%.

Are cheap rates really all they seem?

All these lower rates look great on paper, but may the ‘best’ deals aren't all they’re cracked up to be.

As rates drop, lenders are recouping cash elsewhere by charging higher upfront fees. We found nine of the top 10 five-year fixes at 60% LTV include upfront fees of lb1,495 or lb1,499.

This is considerably greater than the lb999 commonly seen on best-rate deals prior to the pandemic.

In certain cases, taking a deal with a far more expensive rate but a lesser upfront fee can save you money in the long term.

When we crunched the numbers last month, we discovered that a fee-free two-year fix at 1.34% was cheaper within the two-year term than the usual 0.99% deal with a lb1,495 fee.

With this in your mind, it’s important to consider the full costs of deals before you take one out. If you need help comparing mortgages, you may find it helpful to take advice from the whole-of-market mortgage broker.

Five-year fixes and early repayment charges

The idea of locking inside a cheap rate for five years is likely to sound attractive, but whether it’s the best option for you depends on your circumstances.

The big drawback of five-year fixes is they have a tendency to include high early repayment charges (ERCs), which you’ll have to pay if you settle the mortgage within the fixed term.

For example, Nationwide’s market-leading deal comes with a 3% ERC in the third and fourth year, which in turn drops to 2.5% within the third year, 1.75% within the fourth, and 0.75% within the fifth.

If you take out financing of lb200,000, which means you could face electric power charge of lb6,000 should you move house and repay the mortgage in the newbie.

Many mortgages are portable, meaning you can take them for your new property without penalty, but you will dsicover the mortgage on your old home isn’t suitable for your brand-new one, and we’ve received reports of significant delays when individuals affect port their mortgage.

Two-year fix vs five-year fix: three key questions

• How long will you be living in the home?: Given the price of ERCs, it’s only well worth fixing for five years if you’re sure you’ll be residing in your present property too long. If you’re considering relocating a few years, it’s best to have a two-year fix and support the flexibility to switch deals.
• How much control would you like over your mortgage?: Are you the type of individual who wants to keep the finger around the pulse and ensure you’re on the cheapest rate, or can you prefer a ‘set and forget’ mortgage in the future? If you’re the previous, a two-year fix will help you to price your options after 18 months and secure a much better deal. If you’re the second and want the security of knowing your instalments are set in the long run, think about a five-year deal.
• How concerned are you concerning the economy?: It’s an uncertain time right now, and something from the major causes to repair for extended is that you simply won’t be at the mercy associated with a changes to rates of interest or wider economic issues. If you feel now is a good time to stay and secure your rate, take a five-year fix. If you think rates could fall further later on, however, don’t commit for this type of long period. Nobody knows what's going to happen in the future, but it’s worth chatting through your options with a mortgage broker.

Which? Money Podcast: the mortgage market

On a recent episode of the Which? Money Podcast, we discussed the latest developments within the mortgage market, including whether this is the time to secure an offer and also the options now available to first-time buyers.

You can pay attention to the entire episode below.