Two and three-year fixed rate mortgages still undercutting five-year fixes
Quick Summary
Two- and three-year fixed-rate mortgages are still generally more competitively priced than five-year fixes, even though many borrowers would prefer longer-term payment security. Many homebuyers want the lowest monthly repayments but they also do not want to take the risk of their payments getting higher in the future. There is a strong chance the Bank of England base rate will come down before the end of this year, which should lead to marginally cheaper rates.
Two and three-year fixed-rate mortgages are still more competitively priced than virtually all of the lowest five-year fixes, as many borrowers continue to opt for short-term fixe rates.
Mortgage lenders, including Barclays, HSBC, Santander and NatWest, have all lowered their rates in recent days; however, their five-year fixes are not as competitively priced as they were, so there are fewer sub-4% five-year fixes available.
NatWest, Santander, Barclays and Halifax offer a selection of the lowest two-year fixes from around 3.75%, while Santander, TSB and Halifax offer three-year fixed rates from 3.8%.
When is the next base rate cut expected?
UK headline inflation unexpectedly held steady at 3.8%, with policymakers hoping we are at the peak, and prompting traders to increase bets on a rate cut by year-end.
According to the latest market update from Arbuthnot Latham private bank, markets are now pricing in a 70% probability of a December cut, followed by at least one further cut early next year, potentially taking the base rate to below 3.5%.
No change is expected at the November meeting, but markets will be keenly focused on the vote split and the Bank’s updated economic projections.
Why are borrowers still taking five-year fixes if two-year deals are cheaper?
Many homeowners, particularly first-time buyers, want the longer-term payment security and would rather avoid a two-year fix. Another big reason is that mortgage lenders use more generous affordability calculations, so first-time buyers, next-time buyers, and remortgaging customers can borrow more when they take a five- or even a ten-year fix.
What will happen to fixed rates if the base rate is lowered?
There is a chance that the fixed rates will get cheaper, but probably not by much. The Bank of England base rate and mortgage funding costs will need to come down a few more times before fixed rates get much cheaper.
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The information contained within was correct at the time of publication but is subject to change.
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