Here, Which? looks at why two-year deals appear to be in greater demand, the price difference between two year and five-year deals, and reveals key questions to consider when deciding how long you should fix your mortgage.
Greater demand for two-year fixes
Borrowers from all categories – first-time buyers, home movers and remortgagers – are favouring two-year fixes over five-year terms, Moneyfacts data shows.
As of this week, demand for two-year terms (54.8%) significantly outpaces demand for longer five-year fixes (27.9%).
David Hollingworth, of broker firm L&C Mortgages, said: 'Five-year fixed rates are lower than two-year deals but instead of flocking to the medium-term stability of the five year, we’re seeing more opt for two year despite the higher rates.'
Why two-year terms are proving popular
Borrowers could be thinking about fixing for two years in the hope of remortgaging onto a cheaper deal in 2025 when interest rates have potentially calmed.
But betting on this could be a risky approach, as while interest rates are expected to eventually hit a peak, it's anyone's guess as to when this could happen.
Hollingworth commented: 'Borrowers will hope things pan out in their favour over the next couple of years and that the base rate comes back down, although we shouldn’t expect a return to the ultra low rates of recent years.'
Find out more:Average rates for two and five-year mortgage terms
The average rate on two-year deals became more expensive than five-year fixes in October last year, and there is now a 0.4 percentage point point difference between their average cost. The average two-year fix is 6.3%, while the average five-year fix is currently 5.9%.
Using data from Moneyfacts, the graph shows how mortgage rates have dramatically increased since June 2021. Rates hit a peak last autumn, but we are now not far from surpassing it.
What are the cheapest mortgage rates?
The average rates may be around the 6% mark, however, it is possible to find better deals.
According to Moneyfacts, two and five-year products make up 86% of the 4,265 mortgage products currently available on the market, so finding a deal shouldn't be too hard.
Lowest rates on two-year fixed mortgages
Lowest rates on five-year fixed mortgages
Two-year fix vs five-year fix: three key questions
Choosing how long to fix your mortgage is a tough decision, especially in a high-interest environment where minimal rate differences can make a significant difference to your bill. Here are three questions you should take into consideration.
1. How long will you be living in the property?
Five-year fixed-rate deals will likely come with higher early repayment charges (ERCs), than two-year deals. So it's only really worth fixing for five years if you're sure you'll be living in your current property that long.
If you're thinking of moving in a couple of years, a two-year fix can give you the flexibility to switch deals without facing charges for repaying your mortgage early.
2. How much control do you want over your mortgage?
This depends on whether you would prefer to 'set and forget' your mortgage by locking in a rate for a longer term, or prefer the flexibility of being able to find a different deal in the short-term.
If you're the former and want the security of knowing your payments are set in the long run, a five-year deal is worth considering. If you're the latter, a two-year fix will allow you to price up your options after 18 months (you can research options six months before your deal expires) and secure a better deal.
3. How concerned are you about the economy?
It's a very uncertain time at the moment, and one of the main reasons to fix for longer is you won't be at the mercy of any changes to interest rates or wider economic issues.
If you're fearful of what the market will look like in the short-term, a five-year fix will offer peace of mind. But if you think rates could fall in the future, you might not want to commit for such a long period.
What about a three-year fix?
The lesser-known three-year mortgage term offers a 'Goldilocks' compromise to those torn between two and five years.
There are 425 three-year fixed products currently on the market, which equates to 10% of the overall market.
As seen in the table, rates can prove to be competitive. The leading rate at 60% LTV is 5.29%, compared with 5.38% for a two-year fix and 4.97% for a five-year deal.
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